ZTE Bounces Back in Q1 After US Trade Fine

ZTE has returned to healthy growth in sales and profits after a US trade penalty decimated its results last year. (See ZTE Suffers $340M Net Loss on US Fine.)

The Chinese company, which competes against Ericsson AB (Nasdaq: ERIC), Nokia Corp. (NYSE: NOK) and Huawei Technologies Co. Ltd. in the market for network equipment and services, saw net profit for the first three months of the year rise 27.8%, to about 1.2 billion Chinese yuan ($170 million), compared with the year-earlier period, while sales were up 17.8%, to about RMB25.7 billion ($3.7 billion).

The financial performance was buoyed in particular by demand for "pre-5G" technologies, said the vendor, as operators prepare for the arrival of the next-generation mobile standard.

ZTE's 2016 became a nightmare after the company was accused by US authorities of violating trade sanctions by selling network equipment to Iran that included components made in the US. (See ZTE to Pay $892M Fine to Settle US Trade Dispute.)

The company admitted its wrongdoing earlier this year and agreed to pay a fine of nearly $900 million that wiped out any profits in 2016. Restrictions that were subsequently relaxed also appeared to hit sales, which rose just 1% last year.

Since then, ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) has made a number of organizational changes, including the appointment of a new CEO, in an effort to get its business back on track.

The first-quarter results suggest those efforts are bearing fruit and come after ZTE was reported in December to have landed a lucrative deal with merging Italian operators Wind Telecomunicazioni SpA and 3 Italia at the expense of Sweden's Ericsson.

Sustaining the first-quarter momentum will be challenging given the tough market conditions, which have already taken a heavy toll on both Ericsson and Nokia. Even high-flying Huawei has warned the market that growth at its carrier networks business will decelerate in the next few years. (See CEO Interview: Huawei's Eric Xu and Is Huawei in for a Bumpy 2017?)

Huawei revealed in late March that sales were up nearly a third last year. But its failure to boost profits -- after three years of strong growth -- seemed a further indication of the difficult environment. (See Huawei's Sales Soar but Profit Growth Grinds to a Halt.)

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Despite the circumstances, ZTE may be developing into a far more serious contender on the international stage than it has been for several years, according to Bengt Nordström, CEO of the Northstream consulting group.

"Two or three years ago we thought ZTE would retreat to southeast Asia and be a vendor in China and neighboring markets, but they are trying to come back and establish themselves as a global player," he told Light Reading during an interview earlier this year. "With new management it looks like they could make a comeback."

Shedding light on some of its recent innovations, ZTE drew attention to an FDD-based massive MIMO solution and a 5G "Flexhaul" product, integrating IP and optical transport technologies, that it introduced in February.

The company claims that such pre-5G technologies have been deployed in more than 40 networks covering 30 countries and that its virtualization products are now used in more than 180 networks around the world.

ZTE says it invested 13% of its revenues in research and development initiatives in the first three months of the year.

Both Huawei and Ericsson invested about 14% of revenues in R&D last year, although revenue shrinkage at Ericsson meant that actual spending fell.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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