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August 10, 2005

Lenovo sees profit rise after buying IBM PC unit

The Chinese company that bought IBM Corp's personal computer business for $1.75bn on May 1, Lenovo Group Ltd, yesterday posted a 6% profit jump and more than tripled its revenues from a year ago.

By CBR Staff Writer

And having controlled it for just months during its most recent quarter, Lenovo said IBM’s former PC unit was now profitable. The IBM unit previously lost money from 2001 through mid-2004, which roughly when IBM stopped reporting quarterly revenues for the group. The acquisition made Lenovo the world’s third-largest PC maker, behind Dell Inc and Hewlett-Packard Co.

Lenovo chief executive Steve Ward, who joined the company from IBM, outlined an aggressive growth strategy yesterday for the combined company’s notebook and emerging markets segment. And while he said IBM had lost some business as a result of the acquisition, revenue overall was better than he had expected.

We ended up with more demand than we had anticipated as we went through the beginnings of the acquisition over the last quarter, Ward said on a conference call.

Lenovo had grown the old IBM business 5% since it was acquired, Ward said. The IBM piece helped Lenovo grow profit to $45.8m and revenue to $2.5bn.

Already, Lenovo has seen about $1.2m in savings from the integration of IBM’s former unit into its operations, said CFO Mary Ma on a conference call. But, of course, we plan to reinvest the synergy into the marketing and products, she said.

Ward said about half of the major functions of the old IBM unit had been integrated into Lenovo during the quarter – procurement, marketing, finance, accounting, tax, treasury, legal and communications. At the start of July, the former IBM sales team and Lenovo team became a single operation and by year’s end all sales teams would be fully integrated worldwide, Ward said.

In every place in the world there will be only one Lenovo sales team selling all Lenovo products, he said.

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The next phase of the company’s growth plan is to increase its competitiveness through operations and branding. By the end of the year, Lenovo hopes to expand its product line from 60% of electronics products available globally to 90%, Ward said.

The company also expects supply chain advantages because of its predominant location in Asia where the vast majority of electronics components are made, Ward said.

What our competitors do is take components from Asia and ship them with tones of cardboard to other countries in the world where they are assembled, he said. Lenovo, which has 12 manufacturing plants, is able to take an order and ship a product through customs in less than 13 hours, Ward claimed.

Part of the new company’s growth strategy is to boost Think brand equity while growing the Lenovo brand name worldwide. We will continue to have the ThinkPad brand, both as IBM ThinkPad and as ThinkPad alone, Ward said. Partnerships with Intel, Microsoft and Symantec would help spread the Lenovo brand outside of China, he said. He cited Microsoft chief Steve Ballmer recently announcing a new Lenovo tablet PC as an example.

Also Notebooks are one of the very important parts of our strategy in the future, Ma said. Notebook sales drove about 47% of total revenue.

Yang Yuanqing, chairman also made it clear that emerging markets were on Lenovo’s course. The board has unanimously agreed that the growth strategy in emerging markets should be the core strategy in the new Lenovo, he said on a conference call.

During the next three years, Ward said Lenovo would target China, India, Russia and Brazil, which make up more than half of the 28 million PC units that are expected to drive growth in emerging markets by 2009.

Just how Lenovo would capture these markets was not immediately clear. Ward pointed to the company’s management team consisting of former executives of large companies in India, as well as significant Lenovo investors also having connections in the country. And unlike its competitors, Lenovo also has a factory in India, Ward said.

And up until about a decade ago, Russian was a second language for many living in mainland China. Lenovo has employees who deeply understand the PC business and can speak Russian, Ward pointed out. So we have an opportunity we think that is different than others, simply because of the skill base we have available to us, he said.

Ward also talked briefly about a pause in the former IBM sales team during the recent quarter as a result of the merger, but did not give specifics. He also said there were a number of of contracts and relationships with channels that just weren’t appropriate for the combined company that were not renewed.

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