Huawei reports highest growth for five years

Half-year sales up 30%, with enterprise and smartphones the main drivers, though Chinese 4G projects also strong contributors

Huawei had three important boasts to make as it announced its results for the first half of fiscal 2015 - it turned in its highest year-on-year sales growth for five years; it is reportedly well on track to hits its target of 100m smartphone shipments this year; and it achieved an operating margin of 20%, more than twice that of its close rivals.

For the first half, Huawei reported revenues up 30% year-on-year to CNY175.9bn ($28.3bn) and said it would achieve "effective growth" in 2015. This is its highest rate of growth since it started reporting interim results in 2011. Its highest annual growth rate in recent years was in 2008, when its full year revenues were up by 33%.

Carrier infrastructure accounts for two-thirds of Huawei's revenues, making Ericsson, Nokia and Alcatel-Lucent its chief competitors - and like its Swedish arch-rival, it will be waiting to see whether the merger of the other two players will create a more difficult competitive environment, or whether it can benefit from a period of disruption and adjustment.

However, the Chinese company has a different pattern of revenues to those rivals, and a more complex competitive landscape. One, it has a stronger focus on the enterprise, which appeared to be the star of the first two quarters. Huawei does not break out the different operations until its full year report, but its CFO Meng Wanzhou said the enterprise segment had "started to experience accelerated growth", while she was more cautious about the carrier business, just saying it had enjoyed "steady growth". She highlighted cloud computing, storage, agile networks and smart cities as strong performers. In its enterprise segment, of course, Huawei competes aggressively with Cisco.

Two, it still has a major devices business, something all its wireless network peers, most recently Nokia, have now abandoned (though the Finnish firm may return to the fray indirectly through its licensing business). This embroils Huawei in the cut-throat price war for the saturating smartphone space, taking on Samsung and Apple, and a group of its compatriots, such as Lenovo, Xiaomi and ZTE.

According to an internal memo seen by Reuters, Huawei is ahead of schedule in reaching its target of 100m shipments this year. In recent years, the company fallen short of its stated goals for handsets - for instance, for 2014 it set a target of 80m units, but shipped 75m. However, its ability to predict its market and control its supply chain has improved, and so its forecasting has become steadily more accurate - while it was 5m units off in 2014, that was far better than a shortfall of 28m in 2012, when Huawei had predicted up to 60m smartphones but actually shipped 32m.

This year, it looks like getting it right, according to Richard Yu, head of the consumer business unit, who wrote in the memo that Huawei had shipped more than 10m units every month since May. According to Gartner estimates, Huawei was fourth largest smartphone vendor in the first quarter with 18.1m shipments and 5.4% share (Samsung, Apple and Lenovo were ahead of it). That figure would not set Huawei up for its 100m target, but Yu's memo suggests shipments have picked up dramatically in the second quarter, and that Huawei can boost its growth further in the second half. Meng said in her results statement that the midrange Mate7 and high end P8 models had performed particularly well, as well as the Honor family.

The third difference from Huawei's key rivals is, of course, regional. It is virtually excluded from selling critical infrastructure in the US, and some other major economies, such as India, have also raised the bar for purchasing from Chinese firms, officially on grounds of national security. So while north America is Ericsson's largest market, and Nokia CEO Rajeev Suri said this week that a stronger US presence would be one of the biggest benefits of buying ALU, Huawei hardly plays there (except in handsets, where it is launching a big offensive this year and is aiming for a top three market ranking in a couple of years' time).

The lack of US presence is offset by strength in its homeland, where major 4G roll-outs are underway. Meng said of the carrier business unit: "Investment continued to pour into 4G network construction in China. In addition, the growth in global data traffic drives investment in network capacity expansion, while carriers' digital transformation pushes up investment in the ICT industry. These factors helped us maintain steady growth in the carrier business."

Since western vendors are able to compete more effectively in China than Huawei can in the US, it needs additional markets and has invested heavily in European customers and R&D, as well as pulling ahead of its competitors in some emerging economies, particularly in Africa and south east Asia.

Huawei also reported an operating margin of 18%, down slightly from 18.3% in the year-ago period but up on the full year 2014 figure of 11.9%. The second half of last year was hit by high marketing and R&D costs, analysts said, but it remains to be seen whether a similar pattern affects 2015. Margins are very healthy for this market - by contrast, Ericsson's operating margin for Q215 was 5.9%, while Nokia's for Q115 was 8.3% and ALU's was 2.5%.

"We are confident that we will maintain effective growth and steady and healthy development in all business segments in 2015," Meng summed up, though she did not offer specific guidance. It is likely that the smaller units will be the main drivers of that expansion. The enterprise and consumer businesses experienced faster growth than the carrier unit in 2014, increasing sales by 27.3% and 32.6% respectively.

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