ZTE Hails Return to Profitability, Ramps 5G Investment

ZTE returned to profitability for the 2017 fiscal year on the back of sales growth across all three of its major business divisions: The company had reported a net loss in 2016 because of penalty payments to US authorities.

In a preliminary earnings statement, the Chinese vendor, which sells network systems and consumer devices, announced a net profit of 4.55 billion Chinese yuan ($720 million), having reported a loss of RMB2.36 billion ($370 million) for 2016.

The update came in the same week that Swedish rival Ericsson AB (Nasdaq: ERIC) recorded a fifth consecutive quarter of operating losses, while Finland's Nokia Corp. (NYSE: NOK) reported a sharp fall in profitability at its networks business. (See Nokia Outperforms Ericsson in Mobile but Sees Margin Pressure and Ericsson Stuck in Loss-Making Rut, Offloads Majority Stake in Media Unit.)

Both European companies have complained about a downturn in their main equipment markets, but the unstoppable rise of Chinese rivals Huawei Technologies Co. Ltd. and ZTE has also had an impact on their sales.

While Ericsson and Nokia this week reported sales declines for 2017, ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) said its operating revenues were up by 7.49% to RMB108.82 billion ($17.3 billion).

In a short statement, ZTE said it had enjoyed year-on-year revenue growth across its carrier networks, consumer and enterprise divisions.

Its net cash flow from operating activities was also up on the 2016 figure, rising 28.88%, to around RMB6.78 billion. And were it not for the US fine, net cash flow would have risen 136.58%, to RMB12.44 billion ($2 billion), claimed ZTE.

Accused of violating US trade sanctions against China in 2016, ZTE last year agreed to pay a fine of nearly $900 million to settle the dispute.

While the penalty decimated its profits for 2016, ZTE quickly bounced back and last October revealed that its nine-month profits were up nearly 37% on the year-earlier period.

Huawei has also continued to thrive despite the challenging conditions. Last month, the company said it was expecting to generate about RMB600 billion yuan ($95.2 billion) in sales for 2017, an increase of 15% on its revenues for 2016. (See Huawei Hits $92B in 2017 Sales.)

Even so, the growth rate for 2017 is much lower than the 32% that it managed for 2016. And like its Western rivals, Huawei has recently complained that operators have been cutting back on spending.

ZTE's earnings update followed its announcement earlier in the week that it would raise about RMB13 billion ($2.1 billion) through a placement of shares, using the funds to support investments in 5G technology.

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According to a report from Reuters, ZTE plans to invest RMB9.1 billion ($1.4 billion) of those funds in 5G research and development and use the remaining RMB3.9 billion ($620 million) to replenish working capital. Reuters also reports that ZTE plans to invest RMB42.9 billion ($6.8 billion) in 5G technology over the next three years.

Nokia this week said that 5G investments would have an impact on profitability in 2018 before delivering margin improvements in 2019 and 2020, when operators are expected to start rolling out 5G network services.

All of the world's major equipment vendors hope that 5G will kickstart a new round of telco spending on network equipment, but some experts have urged caution.

Bengt Nordström, the CEO of Northstream, a Swedish consulting group, and a former C-level service provider executive, expects the rollout of 5G networks to be very gradual, with 5G services unlikely to fuel revenue growth for operators.

— Iain Morris, News Editor, Light Reading

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