Technology & Ideas

Lenovo’s Profit Beat Came From Accounting Gains

The PC maker’s balance sheet is the main reason why earnings came in higher than expected.

Lenovo’s Profit Beat Came From Accounting Gains

The PC maker’s balance sheet is the main reason why earnings came in higher than expected.

The downside to an upside surprise.

Photographer: Krisztian Bocsi/Bloomberg

Photographer: Krisztian Bocsi/Bloomberg

Lenovo Group Ltd.’s net income beat analysts’ expectations by $53 million, or 45 percent.

While that upside surprise was helped by slightly stronger revenue and a slimmer operating-expense margin — from a reduction in sales and distribution costs — operating income benefited a lot from one-time accounting items. 

A fall in gross margin by 0.3 percentage points from a year earlier to 13.4 percent is a hint that profitability isn’t as solid as it looks. It missed estimates of 13.9 percent.

Balance Sheet-Driven

Lenovo beat estimates thanks to various gains in the value of its assets

Source: Lenovo, Bloomberg

Going through the P&L, we can see that various valuation metrics were the primary contributors to stronger-than-estimated numbers.

Chief among them: fair value gains on financial assets at fair value through profit or loss boosted the operating line by $42.4 million. Another line item, dilution gain on interest in an associate, added $18 million. All up, Lenovo gained $61.3 million from these accounting tweaks. That’s more than the scale of the company’s net income beat, and accounts for 90 percent of the $68.4 million by which expected operating income surpassed reported operating income.

While investors are keen to see a turnaround at Lenovo, this may not be it.

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

    To contact the author of this story:
    Tim Culpan at tculpan1@bloomberg.net

    To contact the editor responsible for this story:
    Rachel Rosenthal at rrosenthal21@bloomberg.net

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