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's still dog days for those in the business of making and selling PCs.

Global PC shipments fell 2.4 percent in the second quarter of the year compared with the same quarter last year, and the value of those shipments dropped 19.1 percent over the same period, according to a report released Wednesday by IDC.

Desktop shipments dropped 17 percent for the quarter as more and more people continue to opt for portables, according to IDC's Worldwide Quarterly PC Tracker report. Consumer laptops and Netbooks accounted for the only bright spot, with overall shipments growing 44 percent over a year ago from a low of 28 percent.

However, the growth in portables came at a cost. Traditional laptops saw shipment growth of 13 percent for the quarter, but the financial value of those shipments declined 6 percent.

Netbooks proved the most popular, with shipments rising almost 25 percent, from 5 percent a year ago. But again, this trend brought down overall value, with Netbooks costing around $400 compared with $900 for traditional laptops.

(Credit: IDC)

IDC sees better times ahead, expecting the market to improve for both unit growth and value. Desktop volume is forecast to be flat in 2010, but portable PCs will grow 16.5 percent, said the report.

The Netbook market will continue to rise. But the trend toward thin, light laptops using CULV (consumer ultra-low voltage) processors will limit the market share of Netbooks, boosting the value of overall PC shipments.

"Although mininotebooks have hurt margins of traditional notebooks, we can expect Ultrathin Notebooks based on new low voltage processors from Intel and AMD to somewhat stem the tide," said Jay Chou, research analyst for IDC's Worldwide Quarterly PC Tracker.

Over the longer haul, shipments of portable PCs should rise 17 percent on average through 2013, delivering 11 percent growth in total PC shipments and close to 5 percent in the value of those shipments.

IBM launched on Monday its Smart Business Desktop service, a combination of thin client computing, virtualization, and the cloud, which is claimed to be the "industry's first public desktop cloud service."

"Today more than ever, enterprises need an affordable, reliable, and efficient way to deploy and manage desktop infrastructures," said Jan Jackman, vice president, IBM Global Technology Services. "The public desktop cloud service is designed to help bring cost savings, flexibility, scalability, and security to clients like never before."

The service will be available to businesses in Europe and North America in October, the company said.

According to IBM, companies will need minimal hardware to use the service. "All that's needed is a machine--a thin client or PC--capable of running an Internet browser and Java. Users simply log on over a secure connection through the Internet," the company said.

The new desktop service is part of a wider strategy around desktop virtualization as a potential alternative to buying new hardware, IBM said. "Through key technology and business partnerships with Citrix, Desktone, VMware, and Wyse, along with IBM tools for customer assessment and strategic planning, IBM is helping clients address PC replacement dilemmas."

In June, IBM announced a set of cloud products and services as part of the Smart Business brand, with an initial focus on cloud development and virtual desktops. The development services include a beta service to allow firms to test software on an IBM maintained cloud, as well as a service called IBM Smart Business Test Cloud--a similar service but based on a private cloud model.

In March, IBM opened its first cloud center just outside Dublin, a facility designed for commercial and academic use which could be used for research projects into computer science or meteorology, the company said.

Although the potential impact of cloud computing and virtualization on the desktop has not received as much attention as the server implications, IBM is not the only company exploring the area. In April this year, Swedish start-up Xcerion launched the public beta test of iCloud, a virtual desktop aimed at consumers and mobile workers. Unlike the hosted application approach provided by Google Docs and other services, iCloud resembles a fully functional operating system running in a browser.

And last week, RES Software launched its PowerFuse Workspace Extender, which the company promises will let IT departments deliver remote server-based and local desktop-based applications in a single virtualized environment, without the user being aware of the underlying infrastructure.

Andrew Donoghue of ZDNet UK reported from London.

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.

In open source or in product development generally, one of the biggest mistakes is to take on a deeply entrenched incumbent on its own turf. Almost inevitably, if you play someone else's game, even if you're a little cheaper/faster/better, you're going to lose. Inertia favors the incumbent, and there's a whole lot of inertia involved in switching vendors.

For this reason, I agree wholeheartedly with Bill Weinberg's suggestion that Linux's opportunity in Netbooks is to focus on the mobile side of the market, rather than bringing a traditional, personal computer bent to the market.

Weinberg writes:

...(O)ne strategic error made by purveyors of Linux Netbooks was to covet the volumes of the global mobile telephony market while following the business models and channels of the legacy notebook marketplace. Linux fans--.orgs, Linux ISVs, and device OEMS--unfortunately approached the Netbook opportunity as a downward extension of the desktop and portable PC business, with volumes of 297M units in 2008 (IDC).

Instead, the Linux ecosystem needs to envision Netbooks (and MIDs and tablets) as building on the worldwide mobile handset business, with its 1.28B annual unit shipments (Gartner) the most lucrative slice of which, smartphones, constitutes 14 percent (ABI) with 20 percent annual growth rates.

Microsoft owns the traditional personal computer market, and probably will forever. But don't lose hope: the best strategies going forward are disruptive, in the Clayton Christensen sense. Microsoft is weak in mobile. This is where Linux proponents should focus their "desktop" strategies.

Apple is gaining on Microsoft in personal computers as much because of its iPhone revolution as its beautiful laptops. If Linux wants to win in Netbooks, and it can, it must do so by undermining Microsoft, not by confronting its desktop dominance directly. Netbooks must be more "Net" than "book," just as mobile phones are more about "mobile" than "phone."

If this is true, Google's Android, which is targeting smartphones first and Netbooks second, may have the upper hand on Intel's Moblin, which aims at Netbooks first, and is largely designed as a Windows replacement.

Malcolm Gladwell recently reminded the world that David beats Goliath with a sling, not a sword. Linux-based Netbooks, playing David to Microsoft's Goliath, should approach the market with a mobile bias, rather than with a personal computer bias.

"Hit 'em where they ain't," said Willie Keeler, which is as true in hitting baseballs as it is in competing with Microsoft.

Follow me on Twitter @mjasay.

The PC market shrunk during the first part of 2009, but not as badly as expected.

Shipments of PCs during the first quarter were down 7.1 percent from a year ago, to 63.5 million units, according to IDC, which released its Worldwide Quarterly PC Tracker on Wednesday. That's an improvement from the 8.2 percent decline that IDC had projected.

It's a "good sign" for PCs, said Loren Loverde, the program director for the PC Tracker at IDC. Loverde says the better-than-expected results were aided by falling prices of PCs and more new PC buyers around the world.

It's telling of the depth of fear the economy is stirring up when these numbers are considered a positive sign, especially when placed in context: a continually volatile world economy, accompanying high rates of unemployment, and companies that continue to hold off on technology spending.

But it's not the only sign that things might be turning around for technology companies. Intel CEO Paul Otellini was surprisingly bullish on the market for PCs Tuesday during his company's earnings call, saying, "We believe PC sales bottomed out during the first quarter and that the industry is returning to normal seasonal patterns...I believe the worst is now behind us from an inventory correction and demand level adjustment perspective."

It may not be totally behind us: IDC is predicting roughly 8 percent declines in growth for the second quarter. But there are several things to consider. Though consumer confidence is low, there are increasingly more PCs with lower prices to match available. Low-cost portables, like Netbooks, continue to be the bright spot for many PC makers, especially Acer and Asus, and helped to stem the overall decline worldwide.

And some regions are faring better than others. In the U.S., considered a saturated market for PCs, declines were kept to just 3 percent. Last month, Dell founder and CEO Michael Dell told an audience during a speech in China that the worldwide demand for PCs was "steady," and echoed IDC's assessment of U.S. consumers' continuing appetite. But of the top five PC vendors in the U.S., only Dell and Apple saw overall shipment declines when compared to the same quarter a year ago. Apple dipped slightly at 1.2 percent, but Dell's drop was more drastic at 16.2 percent.

"The U.S. PC market proved to be surprisingly resilient this quarter as notebooks were still seen as important purchases by many U.S. consumers," said Bob O'Donnell, vice president of clients and displays research for IDC in the report. And the gap between the world's largest PC maker, Hewlett-Packard, and the rest of the field is growing. HP actually saw its overall shipments increase and finally overtook Dell as the leading PC vendor in the U.S.

HP's shipments outside the U.S. increased 2.9 percent, but its shipments to U.S. retailers and consumers was up 12.2 percent. Dell's shipments worldwide declined 16.7 percent worldwide, and 16.2 percent here in the U.S. Though the Texas-based PC maker has done a lot of work to improve its business over the past two years, the first quarter of 2009 was particularly difficult for the company.

"Dell is still largely a commercial company," said Loverde. Less than 30 percent of its sales come from consumer PCs worldwide and the most growth in the market is coming in the consumer category, like Netbooks, and Dell hasn't been as aggressive as the likes of Asus and Acer there, he noted. "But I think we have a combination of Dell tentatively going after this growth segment combined with the challenge of executing with channel partners in a really volatile environment. Obviously the economic crisis is affecting products and consumer demand."

The top five PC makers worldwide stayed basically the same: HP holding 20.5 percent of the market, followed by Dell (13.6 percent), Acer (11.6 percent), Lenovo (7 percent), and Toshiba (5.4 percent), according to IDC's numbers.

In the U.S. only, HP led with a 27.6 percent share, just beating out Dell's 25.3 percent, followed by Acer at 10.5 percent, Apple at 7.6 percent, and Toshiba at 6.6 percent.

Note: This article has been corrected to reflect that the Dell Studio One 19 cannot be configured with an Atom processor.

Just a year ago, this category didn't exist. But after several Atom-powered all-in-one PCs debuted at CES in January, it's officially the hottest grouping of desktops on the market.

A category long dominated by Apple's $1,200 iMac is suddenly rife with nice-looking imitators that pack less power than traditional Windows desktops, but are also gentler on the wallet. They're a subcategory of desktop PCs called Nettops, and, like Netbooks, they're generally defined as a computing platform powered by the Atom processor that runs either Windows XP or a version of Linux. Combined with the all-in-one form factor and a smaller screen than most desktops (between 15 inches and 19 inches), they're essentially the Netbooks of the desktop category.

Photos: All-in-one Nettops

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"A year ago I would have said Netbooks are not going to cannibalize the notebook market. Then the economy went kablooey," said John Jacobs, director of notebook market research for DisplaySearch. Since then, many people who needed a notebook have chosen to spend $400 on a Netbook instead of the typical $800 on a full-size notebook.

"I think we'll see something like that for Nettops," he said. "Either for retirees or younger folks who don't need the portability of a notebook, and just need something to get on the Internet and do basic computing. Nettops, and all-in-ones will be very attractive devices, and we expect to see a lot of retailers who have stayed out of it will jump into it."

The all-in-one category as a whole is expected to grow to more than 6 million units in 2009, and to over 7 million in 2010, according to DisplaySearch. That's almost an 80 percent spike in shipments, which was unexpected at the end of 2008.

Reinvigorating a tired category
In fact, the rise of all-in-one Nettops looks to be the most interesting thing to happen to desktop PCs in years. And, just as the economy helped bolster Netbooks' appeal, so too will it make Nettops more attractive to buyers, industry watchers believe.

As bad as the second half of 2008 treated the PC industry, 2009 is shaping up to be even worse.

PC shipments worldwide will drop 8 percent in the first half of this year, according to a forecast update Thursday to IDC's Worldwide Quarterly PC Tracker. The fourth quarter saw a 1.9 percent decline, driven in large part by large enterprise companies delaying buying replacement PCs during the recession.

But after a rocky start, the industry should turn around a bit by year's end. IDC predicts that shipments will improve over the second half of the year, resulting in small, but positive growth in the fourth quarter, ending with a 4.5 percent decrease for the year. That's a change from the 3.8 percent overall growth for 2009 the company had predicted in early December.

IDC's reasoning that the PC market will have to rebound is because it's driven heavily by replacement cycles, and though companies and individuals may be holding back during this volatile period in the economy, computers don't last forever, especially laptops, whose life spans tend to be shorter than those of desktops.

Though the current economic cycle is bad, it will get better, assures Loren Loverde of IDC. "Pricing will become more aggressive, and there will be further consolidation, but the PC industry will not go the way of the financial or auto industries in this cycle."

What should be more concerning, though, is the plummeting average selling price of those PCs, which is led by an increase in cheap laptops and Netbooks. Prices of PCs sold by Apple, Dell, Lenovo, and Hewlett-Packard dropped 5 percent during the fourth quarter of 2008, which led to an 18 percent drop in revenue for those companies, according to a report also released Thursday by Technology Business Research. But unlike shipments, which have dropped due to current economic factors and are expected to rise again--people will always need to replace their computers--prices aren't likely to rebound.

"The decrease in ASPs is structural and permanent," said TBR PC analyst Ezra Gottheil in a note distributed Thursday. If the industry is to rebound, he says, the most successful PC makers and software providers will figure out how to provide services after sales to increase their currently dwindling profit margins.

Have desktop, will travel.

VMware unveiled Tuesday its open source virtual desktop client VMware View Open Client, designed to provide users with constant access to their personal desktop on almost any device.

VMware View Open Client aims to provide organizations with the ability to host user desktops within their respective datacenters and allow their users to access their personal desktops from a variety of devices at any given time.

Jocelyn Goldfein, general manager of VMware's Desktop business unit, said in a statement:

Now we are sharing our source code in VMware view Open Client so vendors can easily optimize devices to create the best virtual desktop solutions. As a result, IT is able to reduce the total cost of providing desktop environments by allowing low-end or less-expensive devices that provide the same feature set as higher-end devices.

The VMware View Open Client is offered up through the GNU Lesser General Public License version 2.1.