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Lenovo profit drops

World's third-largest PC maker reports an unexpected drop in quarterly profit, largely due to disappointing corporate sales in China.

China's Lenovo Group, now the world's third-largest PC maker, has reported an unexpected drop in quarterly profit.

The drop comes as Lenovo looks to its newly acquired IBM PC unit to restart growth. In May, Lenovo completed its $1.25 billion purchase of the unit. Lenovo also assumed the unit's debt, which brought the total cost to $1.75 billion.

Much of the profit drop was due to a surprise 12 percent fall in Lenovo's corporate PC sales in China, an area where international rivals like Dell and Hewlett-Packard have been very aggressive, said BNP Paribas analyst Marvin Lo.

He added that the IBM purchase may provide some short-term relief in the form of cost reductions, as Lenovo tries to turn the unit around over the longer term.

"The IBM deal will help to reduce some costs, at least in the purchase of components," he said.

Lenovo reported on Wednesday a profit of $21 million (166 million Hong Kong dollars) for its fourth quarter that ended March 31, compared with $24 million a year earlier.

Analysts had expected the company to report a profit of $24.9 million for the quarter, according to the average of 21 analysts polled by Reuters.

Quarterly revenue dropped to $605 million from $647 million, led by the fall in corporate PC sales.

The report was the first for Lenovo since its IBM purchase, a move aimed at expanding abroad amid slowing growth and stiff competition in its home market.

Following the deal, which closed last month, Lenovo expects gross margins to hold steady or go up in the current fiscal year year, Chairman Yang Yuanqing said at a press conference to discuss the results.

The company's gross margins rose slightly to 14.75 percent in the latest fiscal year from 14.62 percent a year earlier.

Yang declined to comment specifically on potential job cuts as Lenovo integrates the IBM assets.

"We'll bring Lenovo's consumer products to the world market, which will give us the growth driver," he said. "Maybe we won't need to cut jobs, and perhaps we might even need more people."

China is the world's second-largest PC market after the United States, with 15.8 million units sold last year and 11 percent growth forecast for 2005, according to market researcher IDC.

Lenovo dominates the fiercely competitive market. It had a 26 percent share last year. But it faces growing competition at home from Dell and HP, which controlled 7.5 percent and 5.1 percent of the China market, respectively, in the first quarter.

Some analysts are enthusiastic about the potential for new growth from the IBM purchase, while others are skeptical about Lenovo's ability to turn around the struggling IBM PC business.

Investors are looking for signs that Lenovo, which has retained much of the IBM unit's top management, can also retain IBM computer customers following the sale.

Last week, Chinese media reported a Dell employee had tried to win over IBM PC customers by saying they would effectively be supporting China if they continued to buy IBM PCs. Dell later issued a statement calling the employee's views "regrettable."

Lenovo last week also announced a deal to supply IBM ThinkPad brand computers to U.S. broadcaster NBC, a unit of General Electric, for the network's coverage of the 2006 Winter Olympics.

Following the IBM PC unit deal, Lenovo now has about 7.1 percent of the worldwide PC market, compared with Dell's 18.9 percent and HP's 15.4 percent, according to IDC.

Lenovo has said it aims to double its profit within three years, and eventually pass its competitors.