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Executive Search & Selection

ZTE Issues H1 Profit Warning

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Tue, 17 Jul 2012

Logo - Light Reading

July is fast becoming a month that ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763)'s management will quickly want to forget.

Only days after news broke that the FBI is investigating the Chinese vendor regarding its business in Iran, ZTE announced that its profits for the first half of 2012 could be down by as much as 80 percent year-on-year. (See FBI Investigates ZTE.)

That gave the company's investors a fright: ZTE's share price is down more than 16 percent on the Hong Kong stock exchange to HK$10.46. A year ago the shares were worth HK$26.35.

ZTE says its net profit for the first six months of this year is on course to be between 154 million Yuan Renminbi and RMB 308 million (US$24.1 million and $48.3 million). That's down considerably compared with the RMB 769 million ($120.5 million) net income recorded for the first half of 2011.

According to this Bloomberg article, ZTE had been expected to report net income of about RMB 684 million ($107 million).

The company didn't provide revenue estimates for the six-month period but noted that overall sales were up compared with last year, when the company reported sales of RMB 37 billion ($5.8 billion). (See ZTE Profit Drops 12.4% in H1.)

So what's hitting the vendor's profitability? In a filing with the Hong Kong Stock Exchange, the vendor says that profits from its investment activities are down significantly compared with a year ago, while it also suffered exchange rate losses due to the depreciation of the Euro.

But the company has also been hit by the postponement of "tender activities" by Chinese operators, which often deliver higher margins than its international activities. In 2011 about 46 percent of its revenues came from ZTE's domestic market. (See Sales Grow, Profits Shrink at ZTE.)

Those domestic delays meant ZTE's first-half revenues were not as high as expected and also contributed to a "decline in the overall gross profit margin."

It's hard to imagine that its main domestic rival, Huawei Technologies Co. Ltd. , has not also been adversely affected by contract delays in China. Both Huawei and ZTE supply a vast range of network hardware and software to China's three main operators, China Mobile Ltd. (NYSE: CHL), China Telecom Corp. Ltd. (NYSE: CHA) and China Unicom Ltd. (NYSE: CHU). (See ZTE Wins China Telecom IP Deal, ZTE Wins Major FTTX Deal From China Telecom and Huawei Launches Trial 4G Network for China Mobile, for example.)

ZTE will report its full first-half earnings in August.

— Ray Le Maistre, International Managing Editor, Light Reading

http://www.lightreading.com/document.asp?doc_id=222877&f_src=lrdailynewsletter