Huawei says H1 operating profit down by a fifth

HONG KONG Tue Jul 24, 2012 6:41pm IST

A Huawei logo is seen above the company's exhibition pavilion during the CommunicAsia information and communications technology trade show in Singapore June 19, 2012. REUTERS/Tim Chong

A Huawei logo is seen above the company's exhibition pavilion during the CommunicAsia information and communications technology trade show in Singapore June 19, 2012.

Credit: Reuters/Tim Chong

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HONG KONG (Reuters) - Huawei Technologies Co Ltd HWT.UL, the world's No.2 telecommunications gear maker, posted a 22 percent fall in first-half operating profit, citing the "significant challenge" of the global economy and the telecoms equipment market.

The company, whose expansion plans have been met with some suspicion in the United States and Australia over concerns about cyber security, said revenues rose just 5 percent although it expressed confidence it would achieve its full-year target of boosting sales 15-20 percent.

The drop in operating profits comes after rival Ericsson (ERICb.ST) reported below-forecast profits and competitors Franco-American Alcatel-Lucent (ALUA.PA) and China's ZTE Corp (0763.HK) 000063.SZ issued profit warnings, largely reflecting sluggish telecom spending during the global economic downturn.

However, Huawei and ZTE may fare better than their western competitors in the second half of 2012 because spending on Chinese mobile networks is expected to pick up, analysts said.

"The second-half outlook will be better for Chinese companies such as Huawei and ZTE because Chinese telecom carriers will pick up the slack in spending in the second half," said Michael Li, a Hong Kong-based analyst with Everbright Securities.

Tenders by mobile carriers to upgrade networks were delayed in the first half and the government is keen for them to meet their spending plans for the year.

Shenzhen-based Huawei, also the world's sixth-biggest handset maker, is unlisted and provides few figures about its corporate performance.

In a seven paragraph statement, it said operating profit of 8.79 billion yuan ($1.4 billion) for January to June was lower than a year earlier but up 20.3 percent compared with the second half of 2011.

"The telecom industry is seeing sluggish growth in 2012 owing to the global economic downturn, which has caused customers to reduce investments while the competition in this industry remains fierce," company spokesman Scott Sykes said.

First-half revenues rose 5.1 percent from a year earlier to 102.7 billion yuan.

Li reckoned revenue growth would pick up to at least 10 percent for the full year, although Sykes said Huawei was confident it could meet its 15-20 percent target.

Huawei did not provide first-half figures on net profit or its gross profit margin.

"Huawei continues to maintain robust growth momentum although the global economic situation and telecom equipment market remains a significant challenge," it said in the statement.

CONCERNS

Huawei, founded by CEO Ren Zhengfei in 1987 after he was made redundant by China's military, has diversified into consumer devices and enterprise networking equipment as growth in its core telecoms gear market has stalled.

The firm is close to taking over market leader Ericsson as the No.1 telecom equipment vendor globally, although securing that top slot will be tough if it fails to gain business with U.S. telecom carriers.

The U.S. government has been suspicious of Chinese companies such as Huawei and ZTE selling telecom gear to its carriers on concerns over possible cyber security and reports that they had sold U.S. computer equipment to Iran.

Both companies have said they had curtailed their business in Iran.

Huawei was blocked in March from an Australian broadband tender. The attorney general cited the need to ensure the "security" of critical infrastructure.

However, both Huawei and ZTE have had considerable success in selling mobile phones globally, including to the U.S. market, where their prices are generally cheaper compared with larger rivals such as Apple Inc (AAPL.O) and Samsung Electronics Co Ltd (005930.KS).

Huawei plans to spend $200 million on advertising this year to help boost sales, Shao Yang, the chief marketing officer of Huawei Device, the division that sells handsets, tablets and dongles, said in June.

However, brokerage Jefferies said the company's 2012 handset sales targets were under threat by the global slowdown.

In a client report, it said Huawei's executives had told the brokerage that Europe and North America were seeing a slowdown in smartphone demand, lower subsidies and a longer replacement cycle.

"In China, there is also slowing demand across the board including tier 2 and 3 cities. China's total telco handset subsidies are expected to remain stable, however, subsidies/handset may decline as prices of smartphones decline," Jefferies said.

With demand weakening in some markets, Jefferies said Huawei's full-year 2012 smartphone shipments might be in the range of 35-40 million, lower than the initial company target of 60 million.

(Editing by Neil Fullick)