All in the details
ZTE’s turnaround looks less impressive up close. Earnings at the Chinese telco equipment maker almost doubled year on year in 2014, but revenue increased by just 8 percent. ZTE may be betting on its smartphones and other internet devices to drive growth, but the company has yet to win over customers.
After ZTE booked its first loss as a public company three years ago, the 94 percent rise in earnings for 2014 from the previous year is a welcome sign that things are improving. The adoption of fourth generation (4G) mobile networks across China boosted the company’s network equipment sales by 15 percent to 46.8 billion yuan ($7.5 billion) in 2014 compared to the previous year. An aggressive marketing campaign in the United States – including sponsorships with three U.S. National Basketball Association teams – helped a 50 percent increase in ZTE smartphone shipments in the country.
Yet ZTE’s overall sales don’t impress much. The company’s modest growth in revenue was driven primarily by its network equipment division. Smartphone sales brought in just 23.1 billion yuan – a mere 6.5 percent increase from the previous year. Better earnings were largely due to a minor improvement in the company’s gross profit margin – 29.1 percent compared to 27.2 percent in 2013.
Costs are likely to increase as the company doubles down on smartphones and wearables outside its home market. ZTE has set an ambitious 10 percent market share target for its handset business in the United States by 2017. That’s partly out of necessity, because the domestic market is dominated by rivals like Xiaomi and Huawei. Low brand awareness outside of China means ZTE will have to keep spending money on marketing to U.S. consumers.
Venturing into smartphones isn’t without logic. And the company owns 13 percent of the 4G patents essential for smartphone makers according to Phillip Capital, which should bring in licensing fees as usage spreads. But both bets are costly: research and development costs already rose 21 percent in 2014. Meanwhile, unsold goods increased seven times faster than revenue. With shares up 72 percent in a year, the race is on to show ZTE can impress consumers the way it has investors.