As impressive as these results are, the prevailing bearish thesis has been the company's margins. In fairness, I don't believe Lenovo has ever demonstrated any struggles in leverage despite well over 80% of its revenue coming from PCs (laptops and desktops). Despite the dismal PC environment, Lenovo still advanced gross margin by 1.5%, which was 70 basis points higher than Street estimates. Likewise, operating margin beat estimates by 40 basis points.
The fact that the company is up to its neck in PCs scares investors. Management understands this, however. This is why Lenovo's future hinges upon its ability to better diversify itself into a legitimate mobile player. While the company has been making great strides in its diversification efforts, there's now a heightened sense of urgency.
For the first time in nine quarters, Lenovo saw a decline in its China PC business. Again, this is not a surprise given a 14% decline in worldwide PC shipments, according to IDC. But Lenovo, which enjoys well over 35% share of the Chinese market, can't afford to let this slippage become a trend. To that end, the company's Mobile Internet Digital Home (MIDH) segment has been an excellent offsetting vehicle.
The MIDH division comprises of "every non-PC" aspect of the business, including smartphones, which grew 206% in the fourth quarter. Remarkably, for the second consecutive quarter, Lenovo's smarphone business, which gained an additional 3.5% market share to an overall 13% share, is outgrowing the overall Chinese smartphone market, which grew in the quarter at a rate of 117%.Meanwhile, total MIDH revenue surged 74% year over year and now accounts for 9% of the company's overall sales. I don't believe Apple and Samsung fear these results today, but it's nonetheless encouraging that MIDH segment is growing at such a brisk pace to the extent that the business has achieved profitability in such a short period of time.