Mobile/Wireless Components

ZTE Returns to Profit Despite Sales Slump

China's ZTE is back in profit after US sanctions tore into its results last year. But its revenue slump will trouble anyone concerned about its long-term prospects -- including the operators that still use ZTE's products.

First-quarter earnings published today show ZTE swung to a net profit of about 863 million Chinese yuan ($128 million) in the January-to-March quarter, from a loss of roughly RMB5.4 billion ($800 million) a year earlier. The equipment maker blamed that loss squarely on its clash with US authorities, which fined ZTE heavily for breaching trade sanctions against Iran and North Korea.

The profit recovery was expected and is obviously good news for stakeholders and customers. But it stemmed largely from sharp cuts to operating costs as ZTE tightened its belt. The decline in sales since the second quarter of 2018 -- when the US temporarily blocked ZTE's access to US components and nearly drove it out of business -- suggests business has not rebounded as ZTE might have hoped.

Quarterly revenues have now declined on a year-on-year basis four times in a row. They crashed 58% in the second quarter of 2018, when ZTE's factories were gathering dust, and dropped 14% in the subsequent third quarter and 17% in the fourth. The latest earnings statement indicates revenues were down nearly a fifth in the first quarter of 2019, to RMB22.2 billion ($3.3 billion).

In the meantime, all ZTE's main network rivals -- Ericsson, Huawei and Nokia -- have reported organic sales growth in the first quarter of 2019.

Unfortunately, ZTE provides hardly any commentary about its latest results, and so it is impossible to know exactly where or why its revenues suffered.

Like Huawei, it maintains a devices business, and a unit that sells directly to enterprise customers, alongside its main telco networks division. Last year, the devices business, accounting for about 22% of total sales, witnessed the steepest decline, with revenues down 45%. The carrier business, which makes up two thirds of total sales, suffered an 11% drop in revenues.

ZTE is clearly eager to boast about its various successes, but there is little reference to commercial contracts in the press statement that accompanies its latest set of earnings. On the 5G side, it cites "co-operation" with 40 global operators and "over 20 trials and tests" in the field of 5G transport. When it comes to network functions virtualization, ZTE talks of "420 NFV commercial/PoC [proof of concept] cases worldwide."

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The danger previously flagged by several analysts is that customers use the 5G transition to shift away from ZTE and toward other, larger vendors. Last year's suspension of business activities caused major disruption for customers like Italy's Wind Tre, forcing that operator to introduce Ericsson as a second supplier, and the mere possibility of further US pressure could drive service providers to look elsewhere. ZTE is far more reliant than Huawei on US-made components, and a second components ban might finish it off.

Investors are not panicking -- ZTE's share price fell just 1.7% in Hong Kong today -- and ZTE is forecasting a net profit of RMB1.2-1.8 billion ($180-270 million) for the first half of 2019, compared with a loss of RMB7.8 billion ($1.2 billion) during the year-earlier half. But if the next earnings report points to further cost cutting and yet another slide in sales, the anxiety will only deepen.

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— Iain Morris, International Editor, Light Reading

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