Huawei was not immune to the weakness in the telecoms infrastructure market during 2012 so far, reporting a 22% drop in operating profit for its first half and only a 5% rise in revenue ‘ low by its recent impressive standards.
Operating profit was $1.37bn for the first six months, down on the same period in 2011 but 20% better than the second half of that year. Sales were up 5.1% year-on-year to $16.07bn. The company’s statements echoed the sentiments of arch-rival Ericsson, reflecting on a slowdown in carrier spending, tough competition in the infrastructure market, and global recession. It said it ‘continues to maintain robust growth momentum although the global economic situation and telecom equipment market remain a significant challenge.’
Also like Ericsson, Huawei expects the second half of the year to be better than the first. Scott Sykes, a senior Huawei executive, told Reuters that the company is still confident of hitting its full year target of 15-20% revenue growth, despite the market pressures, and the additional challenges to the Chinese vendors ‘ security restrictions on major US deals, and an EU probe of alleged illegal subsidies. Huawei denies all the allegations.
On the bright side, Huawei can now claim to be the world’s largest supplier of telecoms systems, overtaking Ericsson in sales terms. As LightReading points out, the two firms do not have like-for-like portfolios (Huawei has devices and a larger enterprise unit), and comparisons are difficult because of currency fluctuations. But using current US dollar rates, the analysts put Huawei on $16.1bn (CNY102.7bn) in revenue, compared to Ericsson’s $15.25bn (SEK106.3bn).
It is also worth noting that Huawei changed its reporting methodology earlier this year, to report for the parent company and not just Huawei Technologies. Without that change its operating profit would have been down 29% year-on-year at CNY8.79bn ($1.38bn) and its sales up by 4.5%.
Meanwhile, as it had previously warned, Alcatel-Lucent fell back into a loss in its second quarter, with its networking division dragging down revenues. The French giant said it would cut a further 5,000 jobs in the wake of the figures.
The firm reported a 7.1% year-on-year fall in revenues to €3.55bn ($4.3bn), but the crucial networks unit suffered double-digit decline. Wireless and optics both saw revenue falls in double digits, somewhat offset by high single digit growth in the third element, IP. In wireless, ALU blamed tougher competition and delayed or reduced purchasing decisions by large carriers.
The company fell back into a quarterly loss, of €254m ($307m), compared to a profit of €43m a year earlier, in a new setback to the difficult turnaround process on which CEO Ben Verwaayen has been engaged for the past four years. He said in a statement: ‘Despite having demonstrated our ability to deliver operational profitability, it is clear from the deteriorating macro environment and the competitive pricing environment in certain regions challenging profitability that we must embark on a more aggressive transformation.’
The company is aiming to cut costs by €1.25bn by the end of next year, an increase of €750m on previous plans, and among its tactics will be to market its huge patent portfolio as an independent profit center.
Amid loss of confidence in the ability of Verwaayen ‘ a very highly regarded CEO in Europe ‘ to turn this ailing ship, the ALU stock sank to its lowest level since at least 1989. At €1.9bn, ALU is now worth about 20% of the $11.6bn that Alcatel paid to acquire Lucent and less than 10% of the value of Ericsson.
Despite the unveiling of impressive products in the wireless division, including the ground-breaking lightRadio architecture, ALU is struggling against the greater scale of Ericsson and Huawei as well as the continuing ripple effects of its tortured 2006 merger. ‘They have to deliver and fast,’ Eric Beaudet, an analyst at Natixis Securities, told Bloomberg, echoing the somewhat panicky sentiment of many analysts, which are focused on cost cutting rather than future strategies.
Net cash shrank by €517m in the quarter to €236m though a patent licensing deal signed in February ‘ but yet to bring in cash ‘ should help on this front. ‘Failure of the patent portfolio monetization effort and the newly announced cost restructuring are big red flags for balance sheet trouble,’ said Jefferies & Co. analyst George Notter in a client note.
‘For the last two years, we’ve tried to be and stay profitable. Unfortunately we’re seeing significant market headwinds,’ CFO Paul Tufano said in an interview. ‘We’re taking steps to restore our profitability sustainably.’