Huawei's Feeling the Pinch

Revenues and contract sales are still ramping up at a fearsome pace, but margins are on the slide

September 8, 2006

3 Min Read
Huawei's Feeling the Pinch

Huawei Technologies Co. Ltd. is on course for a year-on-year increase in annual revenues of more than 33 percent, a company representative has told a business summit in China, but increasing competition means margins will be lower.

Huawei executive VP Hu Yong told the Reuters China Century Summit that 2006 revenues would be above $8 billion, an increase of more than a third over 2005's $5.98 billion, the news agency reported. That's also slightly higher than the $7.8 billion projected by the company earlier this year. (See Huawei 2006 Target: $8 Billion.)

It also points to a major ramp-up in the second half of this year. Huawei informed China's Ministry of Information Industry (MII) last month that its first-half revenues were 25.98 billion renminbi (US$3.3 billion).

That revenue growth, though, is accompanied by lower gross margins of between 37 and 38 percent, compared with between 41 and 42 percent in 2005. As a result, net income, which totaled $681 million in 2005, will not grow at the same rate as revenues in 2006, though Yong didn't provide the summit with a profit projection. The margin squeeze and prospect of slimmer profits comes as no surprise. Huawei and its main domestic rival, ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763), are facing a number of business challenges in China and abroad. (See Pressure Piles on Huawei, ZTE and ZTE Leans on Credit Crutch.).

Huawei also reports its business in terms of the value of signed purchase orders, or "sales." That figure reached $5.2 billion in the first half of 2006, up from $4.15 billion a year earlier. Yong said 65 percent of those sales came from outside China, compared with 58 percent in the first half of 2005. (See Huawei Reports H1 Sales.)

The VP added that full-year contract sales are expected to be worth $10.7 billion, compared with $8.2 billion in 2005, and that Huawei was aiming to increase that figure by a further 30 percent, to $13.9 billion, in 2007. (See Huawei Doubles Overseas.)

Yong also said the company's headcount is set to reach 50,000 by the end of 2006, from 44,000 at the end of June.

While Huawei may be facing some competitive, financial, and regulatory challenges, there is no doubt it continues to have a major impact on the telecom sector, as Heavy Reading chief analyst Scott Clavenna pointed out following his trip to the vendor's HQ in Shenzhen earlier this year. (See Huawei: File Under Travelogue and Report: Huawei Grows Up.)

And the company continues to report significant contract wins and breakthroughs, including 3G infrastructure deals in the U.S., Spain, and Japan, alongside its continuing strength in the emerging markets. (See Huawei Leaps Into US 3G, Huawei Wins V'fone HSDPA Deal, Huawei Wins in Japan, Huawei Builds Uruguay UMTS, Huawei Wins Moroccan IPTV Deal, Vivo Picks Huawei GSM, Magyar Picks Huawei, Comverse, Huawei Deploys HSDPA Network, and Huawei Announces Contract.)

That continuing success helped Huawei achieve the No. 3 position in the carrier Ethernet switch/router market in the second quarter of this year, albeit a very long way behind Cisco Systems Inc. (Nasdaq: CSCO) and Alcatel (NYSE: ALA; Paris: CGEP:PA). But during the same quarter Huawei did bump the French vendor off its optical perch, according to market research reports. (See HR: Huawei Climbs CESR Ladder, Optical Equipment Sales Rise 20%, and Huawei Leads Pack.)

— Ray Le Maistre, International News Editor, Light Reading

Read more about:

Subscribe and receive the latest news from the industry.
Join 62,000+ members. Yes it's completely free.

You May Also Like