Lenovo's Mobile Profits Are a Bit of a Mirage

(Bloomberg Opinion) -- I ought to give credit where it’s due.

Four years after closing its acquisition of the Motorola phone brand, Lenovo Group Ltd. has finally posted a profit in its mobile-phone business. That’s a feat worthy of acknowledgement, so here you go Lenovo: “Well done.”

OK, now on to reality.

“We believe with Lenovo's scale and our operational excellence, we are confident to turn this business around in four quarters to six quarters after the deal closes.”

That was CEO Yang Yuanqing in an investor call. The date: May 21, 2014. The deal closed in October of that year, meaning that it took 16 quarters to turn a profit. Better late than never, I guess. And it’s certainly great to see the mobile business doing well.

Except Lenovo’s mobile business isn’t doing well. While the turn to profit was trumpeted high in its press release, buried much lower was the minor detail that revenue for the business actually fell 20 percent from a year earlier. The company managed to scrape out a profit at the unit only by cutting expenses 24 percent; the result was $3 million in pretax income, little more than a rounding error.

Lenovo's Mobile Profits Are a Bit of a Mirage

One can imagine Lenovo executives searching old pockets and rummaging through drawers in search of just enough revenue to bring its mobile business over the line and into the black. And it needs to. The company’s failure to make good on its spending spree five years ago is the reason why the almost $5 billion of goodwill sitting on its balance sheet can’t be justified. 

Companies are only required to reassess goodwill on an annual basis, which for Lenovo means the end of March. And one of the key benchmarks for justifying this figure is whether the underlying acquisition gives the economic performance that was initially expected. We’ve already established it hasn’t.

Slashing costs and dragging this limping unit into profit is necessary to assuage criticism of this goodwill overhang, about which I may well be the most vocal. Given that fact, expect the March quarter to follow a similar trend: tepid growth (if any) coupled with continued cost cuts.

If it’s lucky, that will mean wider profits for the company’s mobile business. But it doesn’t mean Lenovo’s acquisition is finally a success.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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