The world’s largest PC maker reported a 54% fall in net income to US$249.2 million for the three months ended September, compared with the average analyst estimate of US$224.9 million.
Revenue was US$14.4 billion, matching the average projection. It was the fifth straight decline in quarterly revenue and the fourth straight fall in net income, as an anticipated Chinese economic recovery fell short of expectations.
Lenovo, HP Inc and Dell Technologies Inc are grappling with an industry downturn that emerged after the Covid era, driven by rapid inflation and economic uncertainty around the globe.
But that downward spiral slowed in the third quarter, according to research firm IDC. Lenovo, whose shipments fell 5%, managed to keep the top position despite HP narrowing the gap, IDC said.
Shipments are “well on track” to begin coming back from the fourth quarter, which will help ease inventory and improve Lenovo’s margins, UOB Kay Hian analyst Johnny Yum wrote in a memo ahead of the earnings. “The new replacement cycle should start to kick in in 2024 with the upcoming Windows update.”
Lenovo’s shares have gained almost 50% this year, driven by anticipation of demand for AI training servers and data center construction in China.
Longer term, the US has expanded restrictions on chip exports to its political rival, a move that could hamstring AI development and affect Lenovo’s server business.
The Chinese company buys advanced processors from American chip suppliers like Advanced Micro Devices Inc to Nvidia Corp for its consumer and enterprise products.
Senior Lenovo executives reassured analysts in a call last month that the company was working with suppliers to determine which products were subject to the rule, Citigroup analyst Carrie Liu wrote.
Lenovo’s net income could fall as much as 5% between fiscal 2024 and 2026 if US curbs hit its server unit in China, Goldman Sachs analysts Verena Jeng and Allen Chang estimated ahead of the earnings release.
The Infrastructure Solutions Group accounted for less than 15% of the company’s sales last fiscal year, but is more profitable than consumer electronics such as PCs and smartphones.
“Lenovo’s diversified customer base could support the company’s AI server customer base diversification, managing the negative impact,” according to Jeng and Chang.