ZTE Bucks Downturn but Enterprise Biz Disappoints

China's ZTE has delivered an expected increase of nearly 30% in first-half net profit thanks to impressive gains at its carrier network and mobile device units.

The equipment maker had anticipated the results in an update last month and this week confirmed that net income was up 29.8% for the first six months of the year, to around 2.29 billion Chinese yuan ($340 million), compared with the year-earlier period. (See ZTE Net Profit Up 30% in First Half.)

Fueled by deals with telecom service providers and the sale of mobile gadgets, revenues were up 13.1% over the same period, to more than RMB54 billion ($8.1 billion).

The performance represents a huge improvement on results this time last year, when net income rose just 9% and sales by only 4%.

Those results came after US authorities imposed export restrictions on ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) in early 2016 after accusing it of selling equipment to Iran that included components made in the US, thereby violating trade sanctions.

The penalties were soon lifted but may have caused some disruption to ZTE's business. In March this year, the Chinese company agreed to pay a fine of nearly $900 million to settle its dispute with US authorities once and for all. (See ZTE to Pay $892M Fine to Settle US Trade Dispute.)

While that fine wiped out profitability for 2016, ZTE quickly bounced back in the first three quarters of this year and its latest figures show the momentum has continued. (See ZTE Suffers $340M Net Loss on US Fine and ZTE Bounces Back in Q1 After US Trade Fine.)

Although ZTE remains much smaller than its main international rivals, its carrier networks business has been growing at a double-digit percentage rate while both Ericsson and Nokia report declines amid concern about a slowdown in the market.

ZTE's carrier network revenues rose 12.6% over the first six months, to RMB32.4 billion ($4.9 billion), due mainly to sales of 4G system products, fixed-line and bearer systems in China as well as wireless products in Europe.

But there was disappointment for ZTE on the enterprise and public sector side, with first-half revenues falling 18.3%, to RMB3.8 billion ($570 million), compared with the year-earlier period. ZTE flagged a downturn in government and enterprise spending but did not provide further details.

China's Huawei Technologies Co. Ltd. does not break out revenues to the same extent as ZTE in its interim reports but appears to have grown first-half sales from carrier and enterprise customers by 9.6%, to RMB177.7 billion ($26.7 billion), compared with the year-earlier period. (See Huawei Slowdown Casts Pall Over Network Sector.)

Unlike ZTE, however, Huawei has seen a major slowdown since 2016, when full-year sales were up 40% at its enterprise business and 24% at its carrier networks division.

Ericsson AB (Nasdaq: ERIC) and Nokia Corp. (NYSE: NOK), meanwhile, have continued to report revenue declines and recently said their main addressable markets would decline at a faster rate than previously expected.

Nokia's networks business saw revenues shrink 5% in the first half, to about €10.4 billion ($12.3 billion), compared with the year-earlier period, while Ericsson's sales fell by 8%, on a like-for-like basis, over the same period, to 97.7 billion Swedish krona ($12.2 billion). (See Nokia Shames Ericsson on Profits but Sees Trouble Ahead and Ericsson Shares Slump on Gloomy Q2 Update.)

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Even so, ZTE's fastest-growing division over the first six months of the year was its consumer devices business, which reported a 24% year-on-year increase in sales, to RMB17.9 billion ($2.7 billion). Both Ericsson and Nokia have exited the devices market as manufacturers, while Huawei chalked up growth of 36.2% in first-half revenues, to RMB105.4 billion ($15.8 billion).

On a regional basis, overall domestic revenues for ZTE were up 16%, to RMB32.3 billion ($4.9 billion), in the first half, with sales from Europe, the Americas and Oceania up nearly a quarter, to RMB12 billion ($1.8 billion). Revenues from Asian countries excluding China rose 11%, to about RMB8.1 billion ($1.2 billion).

There was bad news from Africa, though, where revenues slumped by as much as 47%, to RMB1.6 billion ($240 million). ZTE did not explain what had caused the sharp fall in African sales in its earnings update.

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

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