Lenovo CEO Out After First Loss in Years

Personal computer maker Lenovo Group posted its first loss in nearly three years and its CEO resigned, as weak demand and cutthroat competition slams earnings of technology companies.

As part of a senior management reshuffle, China’s largest maker of personal computers said its
three-year contract with CEO William Amelio had expired and he would will be replaced by Yang Yuanqing, Lenovo’s chairman of the board. The company’s founder, Liu Chuanzhi, will become the non-executive chairman.

The news comes as the company reported an October-December loss of $96.7 million, worse than a wide range of analyst forecasts ranging from a $8 million loss to a $96 million loss.

Sales fell by a fifth and Lenovo’s gross profit margin was squeezed by a continued market shift to entry level PCs, aggressive pricing and currency fluctuations, the company said.

The quarterly loss was Lenovo’s first since January-March 2006, when it posted an $89 million loss on restructuring costs.

Of the world’s top four PC names, Lenovo posted the smallest growth last year, with shipments up 8 percent, compared with a 53 percent gain for Acer, 13 percent for HP (NYSE: HPQ) and 11 percent for Dell (NASDAQ: DELL). Lenovo had around 7.5 percent of the global PC market in 2008, when it was overtaken as the No.3 player by more aggressive rival Acer, according to research firm IDC.

Analysts say a recovery for the world’s fourth-largest PC maker depends on how it manages to switch to the low-priced consumer market from corporate clients, which account for the bulk of its sales.

“The outlook is not rosy. A China recovery is nowhere in sight,” said Joseph Ho, telecom analyst at Daiwa Securities. “The push into emerging markets and the commercial segment will take time [to show significant outcome’.”

Lenovo, whose operations were previously all in China, inherited its corporate client focus when it bought IBM’s (NYSE: IBM) PC business in 2005 for $1.25 billion. Amelio joined as CEO in December of that year after having previously served as a senior vice president for Asia-Pacific and Japan at Dell.

The former CEO will continue to act as special adviser at the company until the end of September, the company said.

Shares of Lenovo ended 2.7 percent lower at HK$1.46 in a broader Hong Kong market up 0.9 percent. The stock has lost 78 percent from its 52-week high of HK$6.75.

Looking ahead

Lenovo said the next several quarters would remain very challenging for it and the sector as demand falters in an economic downturn. Analysts also expect the current fourth quarter to be even bleaker than the previous quarter, as its results would include restructuring costs.

“Look at our historical business trend and you will see the fourth quarter is the weakest quarter of our fiscal year,” Lenovo’s CFO, Wong Wai Ming, told a telephone conference.

However, further declines in profit margin will be limited and its business outlook will be better next fiscal year when savings are realized from the restructuring plan, Wong said. The company expects to save $300 million in the year to March 2010 from a restructuring involving axing 2,500 jobs worldwide, cutting executive pay and consolidating its China and Asia-Pacific operations into a single division.

“The real challenge is to modify its business model to support the low-margin consumer business, which will take a longer period of time and is subject to its execution capabilities,” Morgan Stanley said in a note ahead of Lenovo’s results.

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