ZTE Corp today announced a 9.3% rise in first half profits to 1.8 billion yuan, the equivalent of $270 million. Over the same period, revenue rose by 4.0% to 47.8 billion yuan, which although an impressive figure was reportedly below investor expectations at 49.17 billion yuan. ZTE's outlook for the second half is less positive than it has been and the Chairman, Zhao Xianming said in a statement: "The development of traditional telecommunication industries will be subject to stronger challenges in the second half of 2016, given the slowdown in global economic growth and increasing uncertainties." In other words, ZTE's core business of providing network infrastructure is slowing down and the business is blaming slowing worldwide economic growth. ZTE's split between domestic revenue versus overseas revenue is 58% in favor of domestic and 42% overseas.
The networking business has suffered from a challenging six months. A buoyant market for 4G LTE technology in the Chinese market has helped the company, but back in March the U.S. Commerce Department placed export restrictions onto ZTE following allegations that the company broke U.S. sanctions against Iran. This stopped ZTE from supplying network components although the Commerce Department has since suspended this ban until late November pending an investigation. In its statement, ZTE explained that it would continue to fully cooperate with the U.S. authorities but cited it would be difficult to estimate the financial impact stemming from the investigation. A negative verdict could hurt ZTE's exports in the short to medium term, which could put the world's biggest supplier of LTE equipment in a difficult position. Another challenge that ZTE faces is that the Chinese carriers have nearly finished building out their LTE networks, which means capital expenditure is set to be reduced by the industry. The three largest Chinese networks are expected to reduce their capital expenditure by almost 20% in 2016 compared with 2015.
ZTE's directors recognize the importance of maintaining a high level of reinvestment into the business and with this in mind, 15% of revenue generated is spent on research and development. In ZTE's smartphone business, the company's own data shows that it is the sixth largest global 'phone manufacturer. It is showing as the second biggest in Russia and fourth in North America, Sweden, Spain and South Africa. ZTE's premium models, such as the AXON and Blade families, are being well received and they're scheduled to announce a brand new device at IFA in the beginning of September.