TELECOMS: Huawei Growth Revives on Smartphone Drive
Bottom line: Huawei’s accelerating smartphone sales reflect its growing momentum in China, and could prompt it to consider spinning off the unit for a potential IPO in its drive to become more transparent.
Huawei News
Growing momentum for its smartphone business has become the driving force behind a resurgent Huawei, which has just reported solid first-half revenue growth that is showing signs of accelerating after a recent slowdown. That’s good news for Huawei, but less promising for domestic rivals like Lenovo (HKEx: 992), Xiaomi and Coolpad (HKEx: 2369), which are struggling for direction in a crowded Chinese smartphone market where global giant Apple (Nasdaq: AAPL) has also shown signs of a recent resurgence.
Huawei hasn’t been too generous in providing financial data for the first half of the year, saying only that revenue jumped by 30 percent to 176 billion yuan ($28 billion). (company announcement; Chinese article) For anyone who tracks the global market, that figure is already more than double the $12.5 billion in first half sales reported by Ericsson (Stockholm: ERICb), Huawei’s leading rival in its traditional networking equipment core area.
But anyone who follows Huawei knows the company is no longer just a supplier of equipment for big telecoms networks, and in fact that part of the business accounted for just two-thirds of its revenue last year. To offset slowing sales in that segment, Huawei has aggressively pursued the business of building networks for individual companies, and also designing and selling smartphone. After several years of so-so performance in the smartphone space, the company suddenly seems to be gaining rapid momentum.
Huawei’s official first-half announcement doesn’t give any other financials besides the revenue figure and an operating margin of 18 percent. But the 30 percent revenue growth was up sharply from the 20 percent gain for all 2014, though its still not back to the previous year’s level of 34 percent.
Major Sales Milestone
In a letter to employees, the company’s talkative consumer devices chief Richard Yu revealed just how quickly the smartphone business has suddenly started to grow. He said the division passed the milestone of 10 million shipments per month in May, and that it should easily be able to reach and surpass its previously announced target of 100 million unit shipments for the year. That previous target would already be up by a third from 2014, meaning Huawei could now post 50 percent growth or higher for its smartphone business this year.
There’s no specific geographic breakdown for the smartphone sales, but as someone living in China I do sense that Huawei is emerging as a break-out player in its crowded home market. That’s not too surprising, since Huawei is one of the few players that has a long history in telecoms. It also has the depth of resources to develop products that are higher quality and distinctive enough to be different from the many low-end look-alike smartphones now in the market. The major thing it was missing was marketing savvy and the ability to generate buzz, which it may finally be learning to do.
From a broader perspective, I do find it interesting that Huawei and crosstown rival ZTE (HKEx: 763; Shenzhen: 000063) have been relatively successful in diversifying into a space that has eluded most of the world’s major traditional telecoms equipment makers. Ericsson and other names like Alcatel and Siemens also made early attempts to become big cellphone players, but ultimately met with lukewarm results and sold off that part of the business to focus on their core strength in telecoms equipment.
That leads to the interesting prospect that perhaps Huawei will also realize it’s better to separate smartphones from its slower-growth networking equipment business, and perhaps spin off the unit. The company actually considered such a move about a decade ago when its consumer business was still quite small, but ultimately abandoned the plan due to lack of interest. Such a move might make more sense now that the unit has grown so quickly. It could also raise the intriguing possibility for a separate IPO by the unit, as part of Huawei’s broader bid to boost its transparency and look more like a western-style company.
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