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Sales Grow, Profits Shrink at ZTE

Ray Le Maistre
3/28/2012

ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) increased its revenues by an impressive 23.4 percent, to 86.25 billion Yuan Renminbi (US$13.7 billion), in 2011, but saw its operating profits slump 83.4 percent to RMB 429.5 million ($68.2 million) and its net profit dip 36.6 percent to RMB 2.06 billion ($327 million).

That might seem remarkable when many of its main rivals struggled in 2011 to generate organic sales growth (boosting revenues without the aid of acquisitions) or even reported a year-on-year decline in revenues. (See Huawei Sales Top $32B in 2011, AlcaLu Reports €1.1B Annual Profit, Ericsson Suffers Margin Crunch and NSN Suffers in Q4.)

But ZTE benefited from an aggressive push into the global mobile handset market and the ongoing expansion of the communications sector in its domestic market, where the major operators pumped capex into their 3G mobile, fixed access broadband networks and supporting transport infrastructure. (See China Flexes Its FTTx Muscle, Chinese Capex to Hit How Much? and FTTx & 3G Drive Growth in China.)

As a result, ZTE recorded domestic revenues of RMB 39.5 billion ($6.3 billion), up 22.7 percent from 2010.

But ZTE also grew its sales in the rest of Asia/Pacific -- up 23.2 percent year-on-year to RMB 15.6 billion ($2.5 billion) -- and in "Europe, Americas and Oceania," where revenues increased by 42.2 percent to RMB 20.45 billion ($3.24 billion).

The company attributed its operating and net profit decreases to "the slowdown in global economic growth, adjustments to the monetary policy of the PRC [People's Republic of China] government and the Group's own strategy for expanding market shares." In other words, ZTE was forced to cut its prices in China, while abroad it chose to make its offers even more competitive than before in order to grow sales. That international strategy, though, clearly won the company deals in markets where regional incumbent suppliers have previously ruled the roost. (See MWC 2011: 3G Austria Dumps NSN for ZTE.)

Despite the slowdown in profits, ZTE's stock edged up by 0.65 percent on the Hong Kong exchange Wednesday to close the day at HK$20.05 ($2.58).

Terminal growth
In terms of product lines, ZTE's revenues from terminals (including dongles and other devices as well as mobile handsets) grew 52.6 percent to RMB 26.9 billion ($4.26 billion), with the company noting smartphone sales growth in China and ramping demand for mobile handsets in Brazil and India.

But high sales in emerging, highly competitive markets don't deliver great margins: In 2011, ZTE's terminals division gross margin was just 15 percent.

Carrier network equipment sales grew by 10.8 percent to RMB 46.5 billion ($7.4 billion) and generated a gross profit margin of 35.9 percent, while revenues from software, services and other products grew 24.5 percent to RMB 12.8 billion ($2 billion). The gross margin for that category of sales was 26.6 percent.

LTE momentum
Like its main rivals, ZTE is keen to position itself as a leading player in the Long Term Evolution (LTE) sector, claiming 30 commercial LTE deals and engagements with more than 100 operators globally for tests and trials. The vendor is particularly bullish about its prospects for deals with carriers building Long Term Evolution Time Division Duplex (LTE TDD) networks and has already supplied network equipment for a number of commercial rollouts in Japan, Hong Kong and Scandinavia. (See Softbank Preps Pseudo-LTE TDD Service, ZTE Wins in Japan, LTE Voice Is the Talk of Hong Kong, H3G Austria Picks ZTE for LTE and ZTE Scores LTE TDD/FDD Deal .)

In addition, though, ZTE is well placed to pick up a significant amount of LTE TDD network equipment business from China Mobile as the operator builds out its trial networks ahead of its commercial rollout and is fighting hard for a slice of the action in the other major LTE TDD market, India. (See Has ZTE Struck LTE Gold in India?, India Inches Closer to LTE TDD and Clearwire & China Mobile Boost TD-LTE.)

— Ray Le Maistre, International Managing Editor, Light Reading

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