Lenovo first-quarter profit leaps, helped by asset sale, but smartphone losses linger

August 17, 2016 7:49 PM EDT

A Lenovo logo is seen at the computer in Kiev, Ukraine April 21, 2016. REUTERS/Gleb Garanich

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By Yimou Lee

HONG KONG (Reuters) - China's Lenovo Group <0992.HK>, the world's biggest PC maker, said first-quarter profit jumped nearly two-thirds, helped by a one-off asset sale, but its mobile arm lost money again as a $3 billion bet on buying Motorola to diversify has yet to pay off.

Lenovo said on Thursday net profit climbed 64 percent to $173 million for the quarter ended June compared with a year earlier, when profit was hit by restructuring costs. A $132 million gain from the sale of a Beijing office property boosted profit well beyond the $130.1 million average estimate of analysts polled by Thomson Reuters SmartEstimates.

But the company, which bought the Motorola handset business in 2014 to reduce exposure to a shrinking global PC market, said global smartphone shipments plunged 31 percent in the quarter from a year ago. It said the mobile division - housing Motorola and other operations - won't make a profit before the fiscal half beginning October 2017.

"We can completely turn the business around," Chairman and Chief Executive Officer Yang Yuanqing told Reuters in an interview. Lenovo is eyeing the more lucrative premium smartphone sector, he said, while ramping up marketing expenses.

Lenovo previously said it expected a turnaround by this quarter in Motorola's mobile operations, bought from Google (NASDAQ: GOOGL). On Thursday, Yang said Motorola "has made a lot of progress", though the company declined to give numbers for the operations, saying they're now merged into its overall mobile business.

At 0540 GMT (1.40 a.m. ET), Lenovo shares were up 3.2 percent, outperforming a 1.2 percent gain in the broader market <.HSI>.

The firm's drive into smartphones comes as growth in the global market slows while competition intensifies. According to researcher TrendForce, Lenovo had a 4.5 percent share of the global smartphone market in April-June, making it a distant seventh after top player Samsung Electronics Co Ltd's <005930.KS> 24 percent and Apple Inc's (NASDAQ: AAPL) 15 percent.

Like Chinese peer Xiaomi Inc [XTC.UL], Lenovo has been focusing on diversifying away from intense competition in low-margin devices in China - still the world's largest handset market but affected by the slowing Chinese economy.

Lenovo has an "urgent need to formulate a sustainable strategy in smartphones, particularly in China," said Jefferies analyst Ken Hui, citing competition from domestic rivals with extensive sales networks in China such as Huawei Technologies Co Ltd [HWT.UL].

The company said its share of the global PC market grew over the quarter as it performed "slightly better than expected" thanks to a stronger performance in mature markets. PC shipments fell 2 percent year-on-year, compared with a 4 percent decline in the broader industry.

Across the whole company, first-quarter revenue dropped 6 percent to $10.05 billion from a year earlier, beating an average of $9.63 billion estimated by analysts.

"Revenue is better than expected but core profitability is a question mark," said Jefferies analyst Hui.

(Reporting by Yimou Lee; Editing by Kenneth Maxwell)

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