Back in August, Huawei announced its financial results for the first half of 2011. While these results included a topline growth in sales revenue of 11% to 98.3 billion yuan (€11.3 billion), the picture is not rosy for its infrastructure business.

Huawei’s results provided little detail and lacked net profit information that has been reported in prior periods. However based on the information provided, the following observations are made:

Huawei noted that its global terminal sales increased by 64% relative to the same period last year, amounting to $4.2 billion (€3.1 billion). On this basis, we estimate terminal sales as $2.6 billion in the first half of 2010. Assuming certain currency conversion rates, handset revenues likely increased from 16.6 yuan to 28.6 billion yuan.

Subtracting global terminal sales from total sales revenues yields estimates for “non-terminal” revenues. We attribute “non-terminal” revenues to infrastructure sales, which we estimate to have decreased from 72.2 billion yuan in the first half of 2010 to 69.7 billion yuan in the first half of 2011. These estimates imply that Huawei’s infrastructure sales declined in the first half of 2011 by 3.5% relative to the prior year.

· Huawei reported an operating profit of 12.4 billion yuan for the first half. For the purposes of our analysis we were interested in Huawei’s net profit, which Huawei reported to be 14.6 billion for the first half of 2010.

To estimate the net profit for the first half of 2011, we used historical ratios of the net-to-operational profits from prior periods. Using annually reported figures for the last five years, we calculate this average ratio to be 76%. Using this ratio, we estimate that an operating profit of 12.4 billion yuan corresponds to a net profit of 9.4 billion yuan. This implies that Huawei’s net profit declined by 35% year-on-year in the first half of 2011.

On closer inspection of the Huawei’s annual reports, we observed that the ratio of net-to-operational profit was 48.5% in 2008, as compared with 81% to 86% for the other years in a five year time horizon. To account for this anomaly, we recalculated the average ratio of net-to-operational profit excluding the 2008 figure. This resulted in a ratio of 83% and a corresponding net profit estimate of 10.3 billion yuan, or equivalently a year on year net profit decline of 29%.

Using a range of net-to-operating profits between 76% and 83% the calculated net profit for the first half of 2011 would be between 9.4 billion yuan and 10.3 billion yuan. On the basis of this range, we estimate that Huawei’s net profit decreased by between 29% and 35% year-on-year.

There is no doubt that Huawei has disrupted the global infrastructure market with aggressive strategies for product packaging and pricing. But if the trend of declining revenues and profitability for Huawei’s infrastructure business continues, it is unlikely it can sustain its current market approach.

*Phil Marshall is chief research officer at Tolaga Research. For more information contact: *[email protected]* or go to *www.tolaga.com/