Mobile/Wireless Components

ZTE Racks Up $790M Q1 Loss on US Ban

ZTE has issued a revised earnings report for the first three months of the year that puts quarterly losses at more than 5.4 billion Chinese yuan ($790 million) after taking into account a recent ban on its purchase of US components.

The Chinese equipment vendor, which competes against Ericsson AB (Nasdaq: ERIC), Huawei Technologies Co. Ltd. and Nokia Corp. (NYSE: NOK) in markets for networking products, had previously reported a net profit of about RMB1.8 billion ($260 million) for the January-to-March quarter. That figure compared with a net profit of RMB1.2 billion ($180 million) in the same period of 2017.

In its update, ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) said it had booked about RMB6.7 billion ($980 million) in non-operating expenses as a result of the US ban. It had recorded non-operating expenses of just RMB28,000 ($4,100) in its original earnings report.

Because ZTE is so heavily dependent on US-made components, the ban forced it to suspend trading and cease all business operations. It came into effect when US authorities found ZTE had lied about making improvements to its business after the company had already been fined in 2017 for selling US technology to Iran and North Korea, in breach of US sanctions.

Following an intervention by US President Donald Trump, the ban was recently lifted, to the disappointment of some US politicians, when ZTE agreed to pay another $1 billion fine, place $400 million in an account that US authorities can access and make organizational changes, including the replacement of its board and senior management team. (See Senate Republicans Capitulate to Trump's ZTE Deal , ZTE Stock Rises After US Lifts Ban and ZTE Appoints New CEO – Report.)

In a preliminary statement issued in mid-July, ZTE said it was expecting to report a loss of RMB7-9 billion ($1-1.3 billion) for the first six months of the year, down from a profit of RMB2.3 billion ($340 million) in the first half of 2017.

Today's statement blamed amendments on provisions for the $1 billion penalty payment.

ZTE appears to be a victim of the ongoing trade dispute between the US and China, although hardline US critics think a ban is justified by years of Chinese intellectual property theft and ZTE's flagrant disregard for US sanctions.

The Chinese vendor is also seen as a security threat because of its close ties to the Chinese government. Since 2012, major US service providers have been warned off using products from ZTE and Huawei, its larger Chinese rival, in their fixed and mobile networks.

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The components ban has forced other service providers to assess their relationships with ZTE, especially in situations where the Chinese company was the sole network vendor.

Italy's Wind Tre, ZTE's flagship European customer, was recently reported to have switched to Ericsson, and other telcos are understood to be stepping away from single-supplier deals.

Having replaced managers at or above the level of senior vice president, ZTE has lost much of the expertise that made it such a fierce rival to the world's biggest equipment vendors. Its new managers will be under pressure to show that ZTE can still be a force despite the toll that recent US measures have taken.

ZTE's share price closed up nearly 0.9% today in Hong Kong, at HK$13.74, but has fallen from HK$25.60 in mid-April, when the imposition of the US ban forced it to suspend trading.

— Iain Morris, International Editor, Light Reading

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