Lenovo Swings to Loss as Memory-Chip Prices Rise -- Update

A supply squeeze in memory chips is hampering Lenovo Group Ltd.'s turnaround strategy, pushing the PC and phone maker to its first quarterly loss in nearly two years.

Lenovo Chief Executive Yang Yuanqing said a sustained rise in the cost of memory chips hurt profitability across all of the company's major business lines. He said the duration of the price increases--lasting in some cases more than a year--is unprecedented.

"We have never seen this situation in the past," Mr. Yang said in an interview. "Many materials costs, like memory, have increased for a couple of quarters, or even for over more than a year. That's a significant impact on the industry's profitability."

Surging demand for memory chips has led to shortages and higher prices of these components across the electronics industry. The tighter supply has been a boost for the bottom lines of manufacturers like Samsung Electronics Co. and Intel Corp., the world's top makers of semiconductors.

But the higher costs have squeezed Lenovo's margins, contributing to a fiscal first-quarter loss of $72 million, down from profit of $173 million in the same quarter last year. Revenue edged down to $10.01 billion from $10.06 billion.

The company has had difficulty passing the higher costs onto customers because prices for most large customers are set by long-term contracts, Mr. Yang said.

The quarterly loss is a setback for Lenovo's turnaround plan as it grapples with sustained slowdown in sales of PCs--its biggest source of profit and revenue--as well as a slowing mobile-phone market.

It has also been wrestling with the troubled acquisitions of U.S. phone brand Motorola and the low-end server business from IBM, which it has struggled to make competitive.

In the PC business, Lenovo this year lost the title of top global seller of personal computers, slipping to No. 2 behind rival HP Inc. It said its phone market share stood at 3.2%, well behind top rivals Apple Inc. and Samsung.

The company said earlier this year that it would install new management in China to better compete in the fiercely competitive, and slowing, gadgets-and-electronics business.

Lenovo reported a continued slowdown in PC and tablet sales, which fell 7% to 14.5 million units in the quarter.

Mr. Yang said the company plans to turn around the performance of the its mobile business in the second half of the fiscal year. The firm's mobile business reported an operational loss before taxes of $129 million during the quarter.

Write to Dan Strumpf at daniel.strumpf@wsj.com

(END) Dow Jones Newswires

August 18, 2017 01:38 ET (05:38 GMT)