InterDigital Inc (IDCC)

[Gamco]

Huawei operating margins shrink in smartphone shift

Charles Clover in Beijing
July 25, 2016 8:55 am

Huawei posted a 40 per cent rise in first-half revenue as upgraded smartphones and network gear helped China’s largest vendor of telecommunications equipment counter slowing global demand.

But while revenue surged, picking up from 30 per cent growth in the same period last year, Huawei’s operating margin shrank from 18 per cent to 12 per cent, the privately owned company said on Monday.

Some analysts said its switch to smartphones may be weighing on profits.

Leping Huang, technology analyst at Nomura, said the lower margins could be attributed to an increasing mix of smartphones in Huawei’s sales. “Typically, [the] smartphone business has much lower margins than telecom equipment,” he said.

However, Lucky Zhong, who covers the industry at Iresearch, a Beijing-based consulting firm, said that “it’s perfectly natural for a phone maker with rising revenue to see a decline in operating margins”. He added that 12 per cent is “not too bad”, noting that most Chinese smartphone makers have margins of 10 per cent or less.

Sabrina Meng, Huawei’s chief financial officer, predicted the strong sales would continue through the year: “We are confident that Huawei will maintain its current momentum, and round out the full year in a positive financial position backed by sound ongoing operations”.

Huawei, better known for telecommunications infrastructure such as cables, routers and switches than for consumer devices, only began mass-making cheap white-label mobile phones in 2003.

The Shenzhen-based company competes for global dominance of the telecoms equipment market with Sweden’s Ericsson, which last week unveiled disappointing results and on Monday ousted its chief executive Hans Vestberg.

Last year a big bet on high-end own-branded smartphones began to pay off for Huawei, taking the company neck-and-neck in China with domestic rival Xiaomi for top sales spot. Sales rose 44 per cent last year to 108m units, making Huawei the first Chinese company to ship more than 100m smartphones in a year.

Already number three in world smartphone sales, Huawei has been making bold pronouncements that it will surpass both Apple and Samsung Electronics to top the global rankings within five years.

On Monday, Huawei said sales of smartphones and other devices “grew steadily” in the first half of the year, making the company “one of the most favoured device brands in nearly 30 countries”.

The company will release sales numbers for its smartphones and other devices on Tuesday, including an update on new products including its P9 smartphone, which was launched in the spring. That was the first Huawei phone to be launched with a huge marketing blitz involving endorsements from celebrities including actors Scarlett Johansson and Henry Cavill, supermodel Karlie Kloss and Argentine footballer Lionel Messi.

Mr Zhong of Iresearch said Huawei is still dependent on developing markets for most of its smartphone sales and has yet to break into more developed markets where margins are higher.

“Despite the resources Huawei has devoted in the last year to appealing to users in developed countries, the campaigns have not proved to be of much effect,” said Mr Zhong. “The consumers in those countries are accustomed to a quality level that Huawei cannot yet match.”

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