ZTE's turnaround looks less impressive up close. Earnings at the Chinese telco equipment maker almost doubled year on year in 2014, but revenue increased by just 8 per cent. ZTE may be betting on its smartphones and other internet devices to drive growth, but the company has yet to win over customers.
After ZTE booked its first loss as a public company three years ago, the 94 per cent rise in earnings for 2014 from the previous year is a welcome sign that things are improving. The adoption of fourth generation (4G) mobile networks across China boosted the company's network equipment sales by 15 per cent to 46.8 billion yuan ($7.5 billion) in 2014 compared to the previous year. An aggressive marketing campaign in the US - including sponsorships with three US National Basketball Association teams - helped a 50 per cent increase in ZTE smartphone shipments in the country.
Yet ZTE's overall sales don't impress much. The company's modest growth in revenue was driven primarily by its network equipment division. Smartphone sales brought in just 23.1 billion yuan - a mere 6.5 per cent increase from the previous year. Better earnings were largely due to a minor improvement in the company's gross profit margin - 29.1 per cent compared to 27.2 per cent in 2013.
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Venturing into smartphones isn't without logic. And the company owns 13 per cent of the 4G patents essential for smartphone makers according to Phillip Capital, which should bring in licensing fees as usage spreads. But both bets are costly: research and development costs already rose 21 per cent in 2014. Meanwhile, unsold goods increased seven times faster than revenue. With shares up 72 per cent in a year, the race is on to show ZTE can impress consumers the way it has investors.
