The equipment vendor, which has historically reported slim profit margins, announced Sunday that it expects to report a net loss of between 1.65 billion and 1.75 billion Yuan Renminbi (US$263 million to $279 million) for the nine months to the end of September, compared with a profit of just more than RMB 1 billion ($159 million) during the same period in 2011.
The news sent ZTE's share price into a sharp decline on the Hong Kong stock exchange, where it sunk 15.8 percent to HK$10.56.
The losses have come exclusively in the third quarter: ZTE expects to report a net loss for the July-September quarter of up to RMB 2 billion ($318 million), compared with a net profit of RMB 299 million a year earlier. Its third-quarter revenues are set to be around RMB 18.23 billion ($2.9 billion), around 13 percent lower than last year's RMB 20.95 billion ($3.34 billion).
The company had previously warned that financial pressures were starting to weigh on its balance sheet. Although ZTE made a net profit of RMB 656 million ($105 million) during the first six months of 2012, that performance was somewhat worse than in 2011. (See ZTE Issues H1 Profit Warning and ZTE Reports 15 Percent Revenue Rise.)
The company blames the third-quarter loss on four main factors, namely "the current global economic and industry trend, the recognition of low-margin contracts in the third quarter, a delay in some projects of overseas clients, and a change in the procurement mode of domestic operators."
ZTE's management says it will now introduce a number of measures to improve its margins, including: cutting jobs; closing offices that "record loss for a long time, with limited prospect of a turnaround"; improving the profitability of contracts and reducing losses on unprofitable parts of its business; cutting the cost of sales; reducing R&D investments; and consolidating product lines that "offer little development potential."
Some parts of the business will benefit from greater investments, though. ZTE says it will "allocate more resources to its terminals business in North America and Europe, while proactively pursuing opportunities in the wireless and wired broadband segments in emerging markets including China and Asia Pacific." It is also ready to invest further in the LTE market in China, where, it believes, decisions will soon be made on spectrum allocation and investment plans.
Why this matters
ZTE has long been renowned for winning deals with a combination of vendor financing and very low bids. Now those tactics appear to be catching up with it.
That ZTE is suffering in the current economic and political climate -- its name is now much more widely known following recent investigations into its business practices in Iran and the security concerns about the deployment of Chinese technology in the U.S. -- suggests Huawei Technologies Co. Ltd. may be suffering from similar pressures.
That could provide fresh opportunities for Alcatel-Lucent (NYSE: ALU), Ericsson AB (Nasdaq: ERIC) and Nokia Networks , the European vendors that have felt the competitive heat of their Chinese rivals for the past decade.
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— Ray Le Maistre, International Managing Editor, Light Reading