ZTE Profits Fall 40 Percent

ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) has reported a dramatic 40 percent drop in its net profit for 2006, down to 767 million Yuan Renminbi (US$99.3 million) from RMB1,287.7 million ($166.7 million) in 2005, the company has reported in a filing with the Hong Kong Stock Exchange.

The Chinese vendor reported 2006 revenues of RMB23 billion ($3 billion), up nearly 7 percent from RMB21.6 billion ($2.8 billion) a year earlier, but its sales costs and R&D expenses increased significantly to eat into its net margins.

R&D costs increased nearly 45 percent to RMB2.8 billion ($363 million), mainly as a result of customizing products for international markets and from developing new products, particularly WiMax, 3G, and IP Multimedia Subsystem (IMS). (See ZTE Launches ZIMS.)

Domestic revenues dipped 7.7 percent to RMB12.8 billion ($1.66 billion) as sales of CDMA and PHS wireless products declined as expected, though ZTE says it increased its market share in GSM equipment sales.

But international revenues grew nearly 33 percent to RMB10.23 billion ($1.32 billion), accounting for 44.4 percent of total sales. In 2005, international revenues accounted for 35.7 percent of total revenues. ZTE noted strong sales in North Africa and to multinational carriers in the Asia/Pacific region, as well as "groundbreaking sales" in Europe and North America. (See ZTE Enables HSDPA Network, ZTE Takes DSL to Vietnam, ZTE Wins Softswitch Deal , ZTE Wins Czech Deal, ZTE Builds Russian NGN, and ZTE, Telus Sign.)

Revenues from Asia/Pacific customers totaled RMB5.75 billion ($744 million), while Africa accounted for RMB2.56 billion ($331 million) of revenues. Other regions, including Europe, brought in RMB1.9 billion ($246 million).

ZTE's top five customers accounted for RMB9.2 billion ($1.2 billion), or 39.8 percent of total revenues.

Gross profit margin fell slightly to 33.8 percent from 34.6 percent in 2005.

But 2007 could see ZTE's fortunes reversed following its recent success in China's initial major foray into 3G pilot network rollout. (See China Mobile 3G Contracts Awarded.)

The vendor predicts it is "set to capture sound business opportunities as the picture for future 3G investment becomes clearer." But, "competition will become more intense than ever as industry consolidation extends its reach." Despite that, though, "the management is confident that the Group would be able to capture market opportunities amid escalating competition."

That's certainly the view of one industry source in China, who tells Light Reading that, in addition to the recent 3G success with China Mobile Communications Corp. , ZTE is set to win a GSM expansion deal from the same carrier, and that these two boosts should help ZTE's 2007 revenues climb 20 percent to about RMB27.9 billion ($3.6 billion).

In addition, ZTE has expectations of success in the telco TV market. In 2006, ZTE "completed the first mass production of its IPTV products. With increasing carrier investment in value-added services and the growth of the network management business, prospects look promising for this type of products and its related services," the vendor noted in its regulatory filing.

— Ray Le Maistre, International News Editor, Light Reading