IBM International Business Machines Corp

By Wayne Ma and Anjie Zheng 

HONG KONG -- A year and a half ago, Lenovo Group Ltd. spent $5 billion to buy its way into growth sectors such as smartphones and servers as the personal-computer market slowed. But return to growth hasn't come easily.

The Chinese PC maker underestimated how difficult it would be to integrate its 2014 acquisition of Motorola Mobility's handset business, Lenovo Chief Executive Yang Yuanqing said in an interview Thursday. Lenovo itself had grown to become the world's largest PC maker by shipments through the acquisition of International Business Machines Corp.'s computer business more than a decade ago.

"We are definitely facing some challenges" in the mobile-phone business, he said, after Lenovo reported its first annual loss in six years.

The company attributed the weak performance to slowing PC demand and costs related to integrating Motorola's handset business, which it bought for $2.91 billion from Alphabet Inc.'s Google unit.

Mr. Yang said in the interview that he expects losses to continue at the company's mobile unit in the "short-term" but added he was optimistic he could turn it around and "pursue profitable growth over time."

As part of its strategy, Lenovo will be pushing high-end smartphones in the U.S. market. Mr. Yang said Lenovo plans to launch on June 9 in Silicon Valley two new smartphones, one under the Motorola brand and another device that uses Google's Tango platform which comes with features such as motion tracking and depth perception.

Lenovo has struggled to hold ground against Chinese smartphone rivals such as Huawei Technologies Co. and Oppo Electronics Corp., which gained market share in the first calendar quarter, while Lenovo fell out of the top-five rankings, according to market-research firm Gartner.

In the U.S., Lenovo had little presence in the smartphone market but through its acquisition of Motorola boosted its market share to 5.2% last year, according to market-research firm International Data Corp. That compares with 22.7% for Samsung Electronics Co. and 16.2% for Apple Inc.

Lenovo said the company's world-wide smartphone shipments fell 13% in its fiscal year ended in March due to weaker demand in China and the U.S.

It added that its world-wide market share for smartphones dropped 1.1 percentage points to 4.6%. Meanwhile, its mobile business booked a loss of $469 million in its latest fiscal year.

In the competitive China market, Mr. Yang pointed to a shift in the handset business model where smartphones that were once sold solely through wireless carriers are now sold directly to consumers. "The market is shifting from the operator's market to an open market, and unfortunately we haven't built that solid foundation," Mr. Yang said. Lenovo did meet its target to turn Motorola profitable in its fiscal fourth quarter, but it came at the price of steep cost cuts. The company said last August it would cut $650 million from expenses at the unit over the second half of the year, including staff reductions. Mr. Yang said that as long as the smartphone market didn't deteriorate further, the company wouldn't need more cost cuts.

Lenovo said its fiscal fourth-quarter profit rose to $180 million from $100 million a year earlier thanks to lower operating expenses and employee-benefit costs. The company posted a net loss of $128 million for the year ended March 31, which compared with a profit of $829 million in the year-earlier period.

Operating costs dropped by 23% in the quarter, and employee-benefit costs were lower because of the reduced head count, the company said.

Revenue fell to $9.13 billion from $11.3 billion in the year-earlier quarter, as sales fell across all regions.

Shortly after Lenovo's annual results were posted, Mr. Yang sent out an email to his employees pledging not to accept any bonuses offered to him because of the company's financial performance last year, according to the company.

Lenovo's shares are down 37% since the start of the year.

"We all share in our success, and with our culture of commitment and ownership, we must all understand that in tough times we share the responsibility too," he wrote.

--Eva Dou contributed to this article.

Write to Wayne Ma at wayne.ma@wsj.com and Anjie Zheng at Anjie.Zheng@wsj.com

(END) Dow Jones Newswires

May 27, 2016 02:48 ET (06:48 GMT)

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