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Sales Slump Takes Shine Off ZTE's Profits

Ray Le Maistre
3/26/2014
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As previewed earlier this year, ZTE's efforts to get its finances back in order and become a profitable operation once again have been successful, with the Chinese vendor today reporting a net profit of 1.36 billion Yuan Renminbi (US$219 million) for the full year 2013, compared with a loss in 2012. (See ZTE Returns to the Black.)

But that headline number, while positive, doesn't really tell the story of ongoing challenges at ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763), which now needs to focus its attention on how to reverse its declining sales and generate an operating profit.

ZTE's full-year revenues dipped by an alarming 10.6% to RMB75.2 billion ($12.1 billion), while the company reported a full-year operating loss of RMB1.5 billion ($241 million), managing to report a net profit only because of a massive increase in tax rebates and other subsidies. (Note: These are the reported numbers under Chinese accounting rules: ZTE is also listed on the Hong Kong exchange, which has different accounting rules, under which ZTE made an operating profit for the year.)

The dip in full-year sales is in stark contrast to its local and global rival Huawei Technologies Co. Ltd. , which is set to announce an increase of about 8% in audited revenues for 2013, taking its total sales for last year to almost RMB240 billion ($38.6 billion). (See Huawei's Operating Profit Soars.)

The numbers were not a big surprise to investors, as ZTE's share price dipped by just 1% to RMB12.78 on the Shenzhen stock exchange.

The main reason for the decline in full-year revenues was a slump in mobile handset sales. The vendor's Terminals business line registered a year-on-year revenues decline of 24.7% to RMB21.7 billion ($3.5 billion). In its annual report, ZTE noted that sales of feature phones, data cards and 3G devices for the Chinese market declined in 2013, adding that it was determined to enhance the "competitiveness of its terminal products, repackaging them as consumer goods with a more Internet-driven mentality."

Revenues from the Carrier Networks infrastructure business were also down, by 2.2% year-on-year to RMB40.7 billion ($6.6 billion), though the vendor didn't pinpoint any particular weak areas in its portfolio, noting in fact that it experienced "fast growth" in sales of broadband access and switching products.

Without breaking out its numbers any further (apart from one instance), ZTE reported that its next-gen wireless network products had done well, with its 4G LTE business performing well in China, where ZTE claims it "edged its peers in market shares for 4G product tenders." ZTE is so pleased with its 4G performance that it noted (in a company infographic) that its 4G LTE revenues doubled year-on-year to reach $800 million in 2013. (See China Mobile, ZTE Kick Off VoLTE Rollout , Report: Huawei, ZTE Win Big at China Mobile, and ZTE Claims IMS Lead Partner Status at China Unicom.)

It also boasted of the "successful commercial application of its Cloud Radio solution," and referenced its active engagement in 5G R&D. However, revenues from 2G and 3G equipment in China and overseas, and CDMA gear in overseas markets, declined compared with 2012.

Revenues from ZTE's Telecommunications Software Systems, Services and Other Products business unit also dipped, by 6.3% to RMB12.8 billion ($2.1 billion). ZTE siad the decline was mainly due to a dip in the sales of "video and network terminal products in both domestic and international markets."

Overall, domestic revenues accounted for 47.4% of total 2013 sales.

There seems little doubt that ZTE will continue to win further 4G LTE business in its domestic market, but it's also clear that the company also needs to start making inroads into its target markets of the cloud, the data center, and analytics to help get all its numbers heading in the right direction again. (See ZTE Champions the Cloud, Analytics.)

— Ray Le Maistre, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, Editor-in-Chief, Light Reading

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R Clark
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R Clark,
User Rank: Blogger
3/27/2014 | 5:18:35 AM
Handset problem
Most of that profit (806m yuan) came in the fourth quarter, probably due to 4G sales in China, and still its stock got marked down 5% in Hong Kong today.

The handset division is where the problem is - 25% is a big drop for what is supposed to be a growth business.
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