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The Number's Up for Huawei

Huawei Technologies Co. Ltd. introduced a new financial reporting method for its 2011 annual report that resulted in the restatement of its fiscal performance for the past four years, a move that improved its operating and net profit results for each year from 2007 to 2010.

While a shift in reporting methodologies is not an uncommon practice among companies around the world, such changes are usually highlighted and explained in forensic detail. But Huawei and its auditor, KPMG, did not include any such explanation in the annual report issued April 23.

The Chinese vendor has now, though, provided an explanation about the changes, stating its desire to be more open and transparent. What that explanation shows is that there's still a lot to learn about a company that is becoming increasingly important and influential in the global networking and IT sectors The restatements came to light when Light Reading reported the vendor's 2011 results.

Checking the historical numbers against previous Light Reading articles, and then against previous Huawei annual reports, it became clear that in the 2011 annual report, the financials published for 2007 through 2010 differed from those published in previous years.

For example, in the 2010 annual report, Huawei stated that its operating profit for 2010 was 29.27 billion yuan renminbi (US$4.64 billion), its operating margin was 15.8 percent and its net profit was RMB23.76 billion ($3.76 billion).

But in the 2011 annual report, the 2010 operating profit had risen to RMB30.68 billion ($4.86 billion), and the operating margin for that year had gone up to 16.8 percent and the net profit to RMB24.72 billion ($3.91 billion).

Table 1: Huawei Margins and Profits 2007-2010
In Chinese yuan renminbi As reported in the Huawei Technologies 2010 annual report As reported in the Huawei Investment & Holding Co. 2011 annual report
2010 operating margin 15.8% 16.8%
2010 net profit 23.76 billion 24.72 billion
2009 operating margin 14.1% 15.2%
2009 net profit 18.27 billion 19.00 billion
2008 operating margin 12.9% 13.9%
2008 net profit 7.85 billion 7.89 billion
2007 operating margin 9.7% 10.1%
2007 net profit 7.56 billion 12.64 billion
Source: Annual reports issued by Huawei Technologies and its parent company

The most notable change during the past four years was the net profit allocated to 2007. In the 2010 annual report that number was RMB7.56 billion ($1.2 billion), but in the 2011 annual report the net profit for 2007 was reported as RMB12.64 billion ($2 billion).

At the same time, though, the change in reporting has resulted in slightly lower revenues being reported.

The explanation
So why have the reported numbers changed? Huawei quickly responded to questions, noting that whereas it previously had disclosed the financial performance of Huawei Technologies, this year it reported the profit and loss of its parent company, Huawei Investment & Holding Co. (HITC).

As a result, the 2011 report includes historical numbers for Huawei Investment & Holding Co. Ltd., which differ from those of Huawei Technologies.

The 2011 annual report states quite clearly, on the first of its 104 pages, that it is the Huawei Investment & Holding Co. Report. And on page 31, notes from KPMG state that it is "the auditor of Huawei Investment & Holding Co., Ltd. and its subsidiaries (the 'Group')." But it doesn't mention that this is different from previous years and that the numbers published in the 2011 report differ from those published in previous annual reports.

So what does the parent company, which counts only Huawei's Chinese staff as its shareholders, comprise?

Well, there's Huawei Technologies, the global vendor that has done more than any other single company to change the landscape of the global telecom industry.

But it has sister companies, namely Nanjing Software, a research and data processing company, Hui Tong Co., a subsidiary that provides administrative services to Huawei, and Huawei University, along with a number of other subsidiaries.

Huawei tells Light Reading that the parent company's revenues are slightly lower than those of Huawei Technologies as they are adjusted for sales between subsidiaries.

The company adds that it decided to report the parent company's numbers "in order to further enhance the integrity and transparency of Huawei's external financial disclosures."

Integrity and transparency
Huawei, as a privately owned company, is not required to publish any financial details, let alone lay out its operating profits, net income, cash flow and other fiscal metrics as it does in its annual report, so it is to the company's credit that it makes public these numbers each year.

And the company's representatives were quick to respond to questions about this year's report and the reasons for the mismatch with previous publications.

But Huawei is a company that is coming under increasing scrutiny, particularly in the U.S., as it expands its horizons into enterprise IT and consumer devices as well as wide area communications infrastructure. So any changes to the way it presents itself to the outside world are likely to come under close examination.

The introduction of a new reporting methodology, especially one that boosted its apparent historical financial health without a full and detailed explanation, was arguably the action of a company still with much to learn about the way it is perceived by the outside world and one that could prove counter-productive for a company seeking to enhance its integrity and transparency.

— Ray Le Maistre, International Managing Editor, and Robert Clark, freelance editor, Light Reading

COMMENTS Add Comment
sarahthomas1011 12/5/2012 | 5:34:44 PM
re: The Number's Up for Huawei

I understand all of Huawei's logic, but you're right in pointing out that the company still has a lot to learn. It's under heightened scrutiny and needs to act accordingly. Even if it's not doing anything wrong, appearances are just as important for it now.

Flook 12/5/2012 | 5:34:41 PM
re: The Number's Up for Huawei

In my experience, when it comes to allowing or disallowing an overseas company to do a certain type of business in the US, the decision is heavily based on poltical considerations and not on the merits, as they say.

digits 12/5/2012 | 5:34:39 PM
re: The Number's Up for Huawei

Recall the furore around NTT buying Verio back in 2000... that deal almost collapsed because of the thought that someone from another country might be managing hosting servers.

There is no doubt that politics, and lobbying, play a big part in decision-making but it's not the only factor, of course. 

Pete Baldwin 12/5/2012 | 5:34:34 PM
re: The Number's Up for Huawei

Andrew Schmitt of Infonetics points out that Huawei did tell everyone about this change, at its financial conference.

But still... for those of us not at the financial conference (which would be the vast majority, obviously), it would have been nice to know.

digits 12/5/2012 | 5:34:27 PM
re: The Number's Up for Huawei

Right, so they told a select group.... really not the same as explaining it in the document in question so that anyone interested (and there are a LOT of people interested in Huawei) knows exactly how the company is presenting itself, especially when something changes.

At least it has stopped reporting in press releases the annual value of contracts signed, which it used to do (and which was always higher than actual revenues)...

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