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Weaker earnings drive ZTE to finally trim research spend after a 250% ramp up.
ZTE is feeling the cold winds of the capex winter, reporting a drop in both Q3 earnings and revenue.
The Shenzhen-based supplier posted a quarterly net profit of 2.2 billion Chinese yuan (US$304 million), down 11.7%, and 2.9% lower revenue of RMB27.6 billion yuan ($3.9 billion), according to a stock exchange filing.
These numbers are not surprising, given the importance to the company of its carrier equipment business – it accounted for two-thirds of revenue last year – not to mention the shrinking horizons of fellow telecom vendors Nokia, Ericsson and Samsung Networks.
But it is notable that ZTE has cut R&D spending for the first time since its annus horribilis of 2018, when US penalties over its illicit Iran trades took it to the brink of collapse.
Since that time, its R&D budget has grown 250% while revenue has increased just 45%.
Growth has been especially sharp since 2020 – up 71%, with a 17% spike last year to 25 billion yuan. R&D as a proportion of total revenue has also increased, gaining steadily from 11.6% of sales in 2016 to 17.6% in 2022. Last year's sharp increase lifted it to 21.6%.
Q3 spending down 6%
We can attribute this escalation to the company's support of the national R&D effort in the face of US sanctions, rather than to specific commercial requirements.
But for now, at least, that appears to have plateaued. ZTE sliced nearly 6% off the R&D budget in Q3 and has cut spending by 2% for the first nine months of the year. Even so, the RMB18.6 billion ($2.6 billion) budget to the end of September is just a shade under the full-year expenditure of 2021.
Yet while ZTE trims its research spend, China's three operators have all hiked their R&D budgets by double-digit margins.
In particular, China Mobile jacked up R&D outlays by 34% in the first three quarters and is on track to outspend ZTE over the full year. Its R&D budget totaled RMB20.3 billion ($2.9 billion), according to its filing to the Shanghai exchange Wednesday.
Over the same period, China Telecom increased R&D by 19% to RMB8.8 billion ($1.2 billion) and Unicom boosted spending by 26% to RMB5.4 billion ($760 million).
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