Business Tech

After three quarters of losses, Lenovo has turned a profit again. The computer maker announced Thursday that its fiscal second-quarter earnings more than doubled to $53 million versus $23 million a year ago.

Profit for the quarter ended September blew way past estimates of only $24 million from analysts surveyed by Bloomberg.

Despite a 5.2 percent sales decline to $4.1 billion from $4.3 billion in the year-ago quarter, Lenovo achieved its profits through extensive cost cuts and a record leap in market share.

(Credit: Lenovo)

The company had previously kick-started a major restructuring program designed to trim expenses and streamline business operations. As a result, Lenovo was forced to lay off a sizable number of employees and take a one-time restructuring charge of $3 million in the second quarter. But the company now expects to save around $300 million annually.

During the quarter, Lenovo says it also saw its worldwide PC shipments surge 17 percent over the prior year, dramatically outpacing the industry average of only 2.3 percent.

"In the last quarter, our share in the global market climbed to a historic high and we returned to profit," said Lenovo CEO Yang Yuanqing in a statement. "At the same time, our expenses-to-revenue ratio improved notably, reaching the best level since the acquisition of IBM's PC division. These achievements bear witness to the clear strategies we set at the beginning of the year and our effective execution of those strategies."

Lenovo's quarterly results were powered by its notebooks, which contributed 63 percent to overall revenue. Though notebook sales dipped 1 percent from the prior year, shipments shot up 37 percent, compared with an industry average of 16 percent.

During the quarter, the company unveiled a few new products, including the IdeaPad U450p, a thin and light consumer laptop, and SimpleTap, an application to help users navigate the touchscreens on Windows 7-enabled machines like the ThinkPad X200 Tablet and ThinkPad T400s.

Desktop sales, however, fell 13 percent from the prior year's quarter, kicking in only 35 percent to Lenovo's overall revenue. Desktop shipments fell 2 percent, but outpaced the industry average of a 12 percent decline. The company said it has reacted to the PC market shift from desktops to laptops by introducing new entry-level low-cost desktops and revamping its product line for small and medium-sized businesses.

Lenovo enjoyed a stellar second quarter in its home base of China where sales jumped 9 percent to $2 billion. Shipments in the country jumped 28 percent compared with the average of only 0.1 percent. Already the leading PC vendor in China, the company boosted its market share there to 29.4 percent.

Earlier this year, Lenovo said that it would refocus its efforts on China and other emerging markets, a strategy that appears to have paid off.

"Our results are moving in the right direction and we are particularly pleased with our performance in China and in the transactional business model," said Lenovo Chairman Liu Chuanzhi in a statement.

The year had been a volatile one for Lenovo. The company was hit a string of quarterly losses, leading to the resignation of President and CEO William Amelio in February. Job cuts and the restructuring also took their toll.

But based on its second quarter, Lenovo is optimistic about the near term.

"In the coming quarters, we will continue to reinforce our leadership in China, improve the sustainability and profitability of mature markets, seize growth opportunities in emerging markets and our transactional business, continue to strengthen cost structure, and innovate with raising efficiency and customers' needs in mind," said Chuanzhi.

It may not be happy holidays for the retail industry overall. But the Web should provide one bit of good cheer.

Retail sales will probably be flat this holiday season, but online sales are expected to reach $44.7 billion, an 8 percent jump over last year, according to the latest data from Forrester Research.

Among 4,000 online consumers surveyed, 94 percent have made a purchase online in the past three months and plan to do the same for the holidays. As for retailers, 72 percent of those questioned for the third-quarter Forrester report "The State of Retailing Online," said they expect holiday sales to increase over last year.

But to cope with the down economy, online stores will try to weigh customer demand against the need to boost profits, says the Forrester report "US Online Holiday Retail Forecast, 2009," released Monday.

"Despite the lingering effects of the recession, the online space remains the retail industry's growth engine," said Sucharita Mulpuru, Forrester Research vice president and principal analyst, in a statement. "What's different this holiday from past years is that online retailers will manage to the bottom line, which will change some of the tactics they have employed in the past."

Retailers on the Web will offer sales and discounts as always, but of a more limited time and quantity. Automatic free shipping may be jettisoned in favor of free shipping only above certain price levels, says Forrester.

To drive business, online sellers may also take advantage of new trends. More detailed product information will be available, as will social networking tools that let customers share purchasing advice with friends and family.

"Tighter offline inventories may benefit the online channel as consumers go to the Web looking for products--and prices--they can't find in stores this holiday," said Mulpuru. "Online retailers will be ready for them with a special focus this year on engagement and service."

The chip recovery is under way, with quarterly sales forecast to increase year-over-year for the first time in 2009, according to a report from market researcher iSuppli on Tuesday.

Revenue from chip sales is expected to rise by 10.6 percent in the fourth quarter compared to the same period in 2008. This would mark the first time this year that revenue has risen compared to the same period a year earlier, according to Dale Ford, senior vice president, market intelligence, for iSuppli.

"The seeds of the current recovery were sown in the second quarter," said Ford. At that time, manufacturers began to report positive book-to-bill ratios, indicating future revenue growth. This was followed by more sequential revenue growth in the third quarter, according to Ford.

Semiconductor inventories returned to more normal levels in the third quarter after chip suppliers shed stockpiles, he added.

Earlier this month, chip giant Intel said third-quarter revenue was down only 8 percent year-over-year, an improvement over the 15 percent and 26 percent year over year declines in the second and first quarters respectively. Intel also indicated that it expects future growth. "We're finished with the cutting phase of our efficiency effort and now in the growth phase of that efficiency effort," said Intel's chief financial officer Stacy Smith at that time.

Overall, it's been a tough year, however. Global semiconductor revenue is set to contract by 16.5 percent in 2009, following a 5.4 percent decrease in 2008.

And iSuppli has added a good dose of caution to its report. Though sequential quarterly increases in revenue will continue into 2010, sales growth will not be sufficient to lift semiconductor revenue back to pre-recessionary levels until the 2011-2012 time frame, according to Ford.

And there are troubling indicators such as the climbing U.S. unemployment rate, which reached 9.7 percent in August and is projected to exceed 10 percent at its peak, which will continue to constrain consumer spending, Ford said.

At the end of this year, the number of PCs shipped is expected to be lower than the previous year, a rarity for the industry.

In fact, it would be the first time that's happened since 2001, when the tech world collapsed in on itself, according to market research firm iSuppli. A report released Tuesday by iSuppli is projecting that 287.3 million PCs will be shipped in 2009, a 4 percent decrease from the 299.2 million shipped around the world in 2008.

And though expectations weren't particularly high for this year, the industry is now on track to do worse than previously thought: iSuppli had predicted 0.7 percent growth for the year. PC makers have been able to ship more each year for eight straight years, so it's fair to say this dip is unusual. Said iSuppli analyst Matthew Wilkins, "Even in weak years, PC unit shipments typically rise by single-digit percentages."

The culprit in this case is the fading out of the desktop computer. Shipments of desktops are expected to decline 18.1 percent this year, as notebook PCs become ever more popular. Notebooks are on track to grow almost 12 percent this year, for the first time outpacing desktop shipments for a whole year.

It's been clear for several years that PC buyers prefer mobility, and the increasing power of notebooks have helped push more customers in that direction. PC manufacturers have looked for ways in the last couple years to reinvigorate desktop sales. Many have been pushing all-in-one desktop computers, some with touch-screen interfaces. iSuppli's numbers show that mainstream consumers have yet to take the bait.

Another factor in the sagging PC industry is the severe drop off in IT spending by large corporate customers. There could be good news ahead though. Dell's CFO said Monday the company is seeing demand for its computers, servers, and services stabilizing, which could mean they think they've seen the bottom of the market.

After more than a year of doom-and-gloom PC market forecasts, things are looking up.

Market research analyst firm Gartner predicts that the fourth quarter of this year will bring the beginning of a rebound that will gain momentum next year. With a stronger fourth quarter, the industry is on pace to move 274 million PCs worldwide this year. While that's still a 6 percent drop from last year's total shipments of 292 million units, it's not as bad as once thought. Earlier this year, Gartner was predicting a 9.2-percent decline for the year.

Gartner says next year's shipments will swing into positive territory, predicting growth of 10.3 percent. But its analysts say it's too soon to assume the worst is over. People are still delaying purchases while the overall economic outlook remains uncertain.

Customers will begin buying again, but not until later this year, and picking up through 2010 and 2011, according to Gartner Research Director George Shiffler. He also cautioned that the first wide availability of Windows 7 won't spur as many new sales as may be expected.

"Although the buzz surrounding Windows 7 has generally been quite positive, we don't expect the market to significantly deviate from its normal seasonal trends in reaction to its release," Shiffler said in a statement. "Unless Microsoft mounts a major marketing campaign in support of Windows 7, we think consumers will simply adopt the new operating system as they would normally buy new PCs and/or replace old ones. As for professional users, we still expect them to put off adopting the new OS for at least a year until they have fully tested their applications against it."

This was originally posted at Between the Lines.

Global chip sales rose to $15.6 billion in April, up 6.4 percent from March. That's the good news. The bad: chip sales are still down 25 percent from April sales of $20.9 billion a year ago, according to the Semiconductor Industry Association.

The SIA provides the following color (statement):

• PC demand is better than expected as inventory is replenished;

• PC sales in 2009 are expected to fall 6 percent better than estimates that expected a decline of 12 percent;

• Cell phone sales also aren't as bad as expected;

• Cell phones and PCs account for 60 percent of chip sales.

Add it up and the chip market remains weak with corporate IT spending down, consumer electronics mixed, and the auto industry awash in red ink. But there does appear to be at least a new normal in the chip industry with the usual seasonal patterns showing up.

My co-host on the Overcast podcast, Geva Perry, has published a very compelling post arguing for the demise of the traditional enterprise sale--the deal brokered by the highly extroverted, commissioned sales rep with the help of a team of sales engineers, marketers, consultants, and so on over the course of 6 to 18 months.

Geva established his case by relating the observations of venture capitalist Charlie Federman:

I met today separately with two successful CEOs who, unprompted, told me they were de-emphasizing their marketing/sales efforts to enterprise accounts; one company is in the application arena, and the other is in the infrastructure space.

Each told a similar story:

They don't have the "patience or resources to go through the hoops" required in committee sales. Translation: they don't want to fund the direct sales force/field engineers for the traditional six-month sales cycle, where they have to commit the equivalent of hundreds of thousands of dollars upfront before a decision is made. Moreover, if the decision is positive, it's normal to wait a few more quarters for implementation to move forward.

Each stressed that the opportunity cost is simply too high when many alternative channels are present that are open to a "fast test/fast purchase" decision cycle. Today, their biggest issue is prioritizing their time/resources in an environment where they receive near-instant market feedback from traffic, trial, and conversion statistics. Direct enterprise sales (as opposed to business development) is being extracted from their company DNA.

Geva then goes on to break down the decline of the enterprise sales empire:

The history of the trend away from the enterprise sale is easily traceable. It starts with free-trial CDs; it really picks up steam with downloadable enterprise software (salute to the WebLogic folks). It becomes downright mainstream with open source: Linux/RedHat, Jboss, MySQL, and the rest. And now, we come to cloud computing: the final nail in the enterprise sale coffin.

There is some truth to this. I worked for six months at open-source enterprise content management vendor Alfresco, and their model was fascinating: with the exception of a single direct sales representative, the entire business was run over the phone, Adobe Connect, and Skype. Deals were small, but numerous. "Try then buy" was the norm, and it worked--at least at that scale.

Could an indirect-only model work at a much larger scale, though?

Jim Liddle doesn't seem to think so. The architect-turned-sales-representative made his rebuttal on his wonderfully titled "Liddle Thoughts" blog:

Most of the enterprises I am dealing with are looking at public cloud infrastructures as being an enabler for outsourcing suitable applications or services. What is key for them in doing this is using software that they can use in-house as well as being able to be used on the cloud. Same skill sets, in some cases the same code, so that the transition to the public cloud is seamless. To get companies to engage on public cloud infrastructures right now requires a direct sales model, certainly until some form of tipping point is reached, and even then I believe that for certain classes of public cloud software, direct sales will always be needed.

In many ways, cloud licensing is an evolution of licensing models that include single user/single license, multiple users/shared license, temporary or fixed period licenses, pay-per-use licensing, subscription licensing, perpetual licensing, etc.

On top of this we have the private cloud in which companies use software and infrastructures to provide public cloud-type features available in-house. Make no mistake that the majority of this will be enterprise software with some major enterprise players in this space such as VMWare with VCloud and Citrix with C3, as well as companies such as GigaSpaces, who in many cases will partner with such companies and provide additional innovation. There will of course be room for innovative open-source software, such as Eucalyptus.

Liddle concludes with his belief that "enterprise license models, for certain vendors, are changing; for others, existing models have a new buddy, but I see this as evolution rather than revolution."

I'm not sure where I stand in this debate, but I have to agree that enterprise sales is a huge, difficult, expensive pain right now, and that cloud computing has the potential to bypass much of this pain. Then again, I know most enterprise IT organizations want accountability and responsiveness from the vendors on which they build their business. Direct sales puts a name and a face to that in a way that indirect sales or "do-it-yourself" never will.

Another possibility, I suppose, is that enterprise sales shifts from software to services, just like everything else.

I put the question to you: Is enterprise sales dead? Has your organization stopped looking at the multimillion-dollar licensing or hardware deal? If you are a commissioned sales representative, are you nervous about your profession's future?

Correction, 11:06 a.m. PST: This story initially misstated the day the report was released. It was Friday.

Update at 10:31 a.m. PST, with more information from the analyst report and a chart.

A J.P. Morgan analyst cut his financial estimates for Apple's fiscal second quarter and fiscal 2009 on Friday, pointing to expectations that its iPhone and Mac sales may be weaker than previously anticipated.

Apple fell as low as 7.3 percent in early morning trading Friday to $82.33 a share.

"We are lowering our estimates for the March quarter and beyond," Mark Moskowitz, a J.P. Morgan analyst, said in his research note. "The deepening global downturn is a driver."

Moskowitz lowered his quarterly earnings estimates to $1.01 a share from his previous estimates of $1.02 a share. And he dropped his quarterly revenue estimates to $7.62 billion from $7.72 billion.

And for fiscal 2009, Moskowitz cut his earnings estimates to $4.73 a share from $4.82 a share, and dropped his revenue projections to $32.98 billion from $33.97 billion.

In light of the weakening economy, Moskowitz also cut his estimates for Mac unit shipments to 2.19 million in the fiscal second quarter, down from his previous estimates of 2.39 million.

iPhone unit shipment estimates were also lowered to 3.4 million in the fiscal second quarter from Moskowitz's previous projections of 3.8 million.

"While a lot remains to the March quarter, inputs from our primary research contacts suggest that Mac and iPhone volumes had been trending below our prior expectations," Moskowitz noted in his research note.

Here's a look at Moskowitz's revised estimates for Apple's revenue, unit shipments per category, profit margins and earnings for the fiscal second quarter and fiscal year 2009:

(Credit: J.P. Morgan Securities)

In further elaborating on Apple's product line, Moskowitz notes in his report:

We acknowledge that there could be a channel fill benefit over the next 30-45 days related to the Mac refresh. While this is still a potential, we do not expect any fill period to fully counter the bigger issue of weakening PC demand in general. Apple's desktop line had been the last to be updated, so we think the company could partially offset the weakening demand environment for desktop PCs with potential buzz around new features and price points.

Looking ahead, we expect investors to key in on the iPhone new product funnel. with the Mac refresh out of the way and summer approaching, it is our view that investors expect a June launch of the next iPhone. We expect Apple to follow the iPod expansionary course with the iPhone over time. In other words, refresh the original form factor in the first two years or so and then introduce newer form factors. While only conjecture on our part, we expect the next iPhone addition to be a smartphone but one with a smaller footprint. We do not expect too much fluctuation in the feature set or pricing, though.

The analyst also cut his price target on Apple's stock, predicting it will hit $100 a share by the December period, versus his earlier prediction of $102 a share.

This was originally posted at ZDNet's Between the Lines.

Circuit City said Friday that it is in talks with "two highly motivated and interested parties" about selling the company as a going concern. Meanwhile, Best Buy, the largest electronics retailer in the U.S., reckons it continues to take market share.

Circuit City asked the bankruptcy court to approve procedures that officially would sell Circuit City in total, by business units, or by assets such as inventory.

In a statement, Circuit City said:

These interested parties are considering providing additional financing to allow the company to sustain operations and move forward with a subsequent restructuring through a stand-alone plan and/or purchasing the company or all or substantially all of the company's assets. The parties have substantially completed due diligence and now are in negotiations with the company and the company's major stakeholders in order to finalize such a transaction. While the company is optimistic that a transaction can be successfully finalized, no assurance can be given that this will occur.

If these transactions don't occur by Jan. 16, Circuit City could liquidate.

Separately, Best Buy narrowed its financial outlook. Best Buy on Friday said its holiday revenue was in line with revised expectations, but same store sales fell 6.5 percent.

The electronics retailing giant made the announcement at the Consumer Electronics Show.

By the numbers:

• Revenue was up 4 percent for the month ending Jan. 3 to $7.5 billion, in line with expectations.
• Best Buy narrowed its earnings targets. The company is predicting fiscal 2009 earnings to be $2.50 to $2.70 a share, excluding a $111 million investment impairment charge. The company had projected 2009 earnings between $2.30 and $2.90 a share.
• The company will take a fiscal fourth quarter charge of $60 million for its voluntary severance program.

Here's the breakdown of sales by category: