Disney revenues surge as world waits for streaming service

Revenues at ‘The House of Mouse’ have surged more than 34% for its final quarter of 2019, collecting more than £69.5 billion for the full year.

While investors will certainly be happy with the news, perhaps the best is yet to come. Next week, Disney’s own streaming service will enter int frame for the first time, while it has also been confirmed the service will launch in the UK on March 31. With analysts expecting more than 15 million subscribers in the 12 months, 2020 could be a very profitable year.

“Our solid results in the fourth quarter reflect the ongoing strength of our brands and businesses,” said Robert Iger, CEO of The Walt Disney Company. “We’ve spent the last few years completely transforming The Walt Disney Company to focus the resources and immense creativity across the entire company on delivering an extraordinary direct-to-consumer experience, and we’re excited for the launch of Disney+ on November 12.”

Fourth Quarter Full Year
Total Revenue $19.1 billion $69.5 billion
Costs $16.8 billion $57.7 billion
Net Income $1.05 billion $11.05 billion

Despite costs climbing 49% for the three months ending September 28, share price in overnight trading climbed more than 5%. With the launch of the $7 streaming service only days away, it is clear Disney is not shy about spending some cash to compete with the likes of Netflix and Amazon Prime on a global scale.

Iger as bet big on the streaming service to lead a new wave of revenues at Disney, and for the sceptics out there, there are now several interesting partnerships to back-up an already packed content library.

On the telco side, Disney has teamed up with Verizon to offer free subscriptions to customers who have an unlimited data tariff, while iLifers will receive a free subscription for 12 months when purchasing a new Apple TV.

Although the content world is certainly looking congested already, Disney looks like a service which could challenge the leading pair. Disney has the brand awareness, content library and aggressive investment strategy to make it work, though delivering effective customer experience will be critical. November 12 will be the day customers first get the opportunity to taste Disney+, so judgement will be reserved until this point.

Facebook revenues surge as EU antitrust team revs its engine

Facebook has been on somewhat of a rollercoaster ride over the last 24 hours, revealing another quarter of impressive year-on-year growth, while rumours circulate it could be facing a competition probe.

In Menlo Park, California, CEO Mark Zuckerberg and CFO David Wehner boasted of another quarter which demonstrated the Facebook advertising machine is not slowing down, while on the other side of the Atlantic, Reuters has suggested the European Commission has taken the first steps in an antitrust investigation concerning the Marketplace feature.

What is worth noting is these are only the preliminary steps, and it will be some time before the European Commission decides whether to formally launch a full-investigation. After complaints alleged Facebook was using its market power to create an unfair competitive advantage, the European Commission has sent surveys to various players in the industry to better understand how the competitive landscape has developed.

For Facebook, this should be seen as a worrying sign. Details are thin on the ground for the moment, but it does appear rivals in the ‘classified ads’ segment are suggesting Facebook should not be allowed to diversify. The questionnaire sent to various players in the industry asks how many referrals came from the social media platform.

The question which seems to be asked here is whether it should be allowed to leverage such a massive user-base to steal business of rivals. The issue which Facebook might face is that it doesn’t collect revenue in the same way as those who are challenging the Marketplace.

Traditionally, the ‘seller’ is charged by the media outlet to engage the ‘buyers’ though Facebook has undermined this transaction. There is no charge to sellers to list products, with revenues being driven through sponsored listings and promotions embedded through the search results. Facebook is using its traditional ‘walled garden’ approach, creating an experience for users but charging companies for the pleasure of engagement.

Should the European Commission come to the consumer this is an abuse of market behaviour, rather than the evolution of commerce as we progress towards the digital economy, Facebook’s pursuit of new revenues by expanding the ‘walled garden’ model to new segments could be threatened.

Although revenues are looking healthy for the moment, a glass ceiling will be hit unless Facebook can offer new experiences. Advertising revenues have grown in-line with the userbase of the platforms, though there are only a finite number of users across the world. Facebook has to think of new ways to keep people on the platforms for longer, and for new reasons. Marketplace has been a success, though this is a threat to all diversification not just eCommerce.

From a revenue perspective, these new initiatives do seem to be aiding growth. Total revenues for the three-month period ending September 30 stood at $17.383 billion, a year-on-year increase of 28%, while net income was $6.091 billion, up 19%.

Daily actives users and monthly active users are also on the up, 9% and 8%, with the team now claiming 2.2 billion people now use Facebook, Instagram, WhatsApp, or Messenger on a daily basis.

Facebook is a business which is certainly facing risks, though the potential to diversify is quite remarkable. New elements such as the Marketplace or the dating features being tested, are re-engaging users at a time when the social media giant seemed to have lost its way. However, this progress could be undermined should European antitrust authorities believe the Facebook disruption is only possible because of an unfair advantage.

Revenues are down, but BT looks ready to do battle

Total revenues and profits might have slipped slightly at BT, though it met expectations and it seems the business is lining-up its pieces for an assault on the UK market.

With the assets the telco has at its disposal, BT should dominate the market leaving the scraps for rivals to fight over, but this has not been the case. There have been some lavish spending sprees over the last few years, though the refreshed management is taking a more network-orientated approach as opposed to the ‘bells and whistles’ of the previous regime.

“BT delivered results in line with our expectations for the second quarter and first half of the year, and we remain on track to meet our outlook for the full year,” said CEO Philip Jansen.

“We’ve invested to strengthen our competitive position. We’ve accelerated our 5G and FTTP rollouts, introduced an enhanced range of product and service initiatives for both consumer and business segments, and announced price and technology commitments to deliver fair, predictable and competitive pricing for customers.”

Capital expenditure for the first six months of 2019 was £1.88 billion, up £225 million year-on-year, although this excludes the grants from the Broadband Delivery UK (BDUK) programme. Such increase should come as little surprise as the team has been enthusiastically shouting about 5G launches across the UK (now up to 20) as well as new homes which are being passed with fibre (23,000 per week) in pursuit of the Government’s lofty full-fibre goals.

In years gone, BT looked like a telco which was defined by its challenge to Sky in the content market, while few could recognise the synergies with EE. The BT of today looks very different, thrusting the connectivity assets to the centre of the business. With the convergence business model proving its worth in various European markets, see success at Orange for evidence, BT is taking inspiration.

With the fixed network in the UK, which is being aggressively fibred-up, 30 million mobile subscribers, five million wifi hotspots and a new TV proposition to be launched at some undefined point, the cross-selling opportunities are abundant should BT be able to nail the experience on the assets. This seems to be the focus of investments under Jansen, instead of going for the glamorous, the team is concentrating on delivering the core connectivity experience and then bundling on additional added-value options.

Across the business, the Average Revenue per Consumer (ARPC) for broadband remained relatively flat at £38.5 per month, while postpaid mobile decreased to £20.8, down 5.5% though as this has been attributed to new regulation and the SIM-only trends it is nothing too be too concerned about. Interestingly enough, the number of Revenue Generating Units (RGUs) per household has increased to 2.38. This is where the convergence strategy could make a very positive impact.

As a business model, convergence is more efficient and creates higher customer loyalty and NPS. Bundled at a suitable price-point, and it looks like a very attractive offer to steal subscriptions from rivals also. However, experience does have to be very high across the entire portfolio, hence the increased spend on the network over recent months.

This is where BT could be a very interesting business over the next couple of months. The ‘Halo’ converged products could attract interest, especially when the hotspots are bundled in also. Rivals might be able to compete with BT with a few bundles, but no-one can offer the same breadth across mobile, broadband, wifi and content. This is a massive advantage, and BT should be shouting and screaming.

We might have to wait a couple of months before the refreshed TV proposition is fully polished, but this is another reason why no-one should worry too much about the slipping revenues for H1. BT is still lining up the various pieces before an aggressive push with the full convergence offer. It has been suggested the TV proposition will not be ready until the new year.

With its assets, BT should be untouchable. It still has work to do on the fibre rollout, 5G deployment, finalising the TV offer, improving the wifi experience and aligning the BT and EE brands, but the ‘Halo’ converged offer could create some serious noise.

2019 First Half Financials
Total Revenue £11.467 billion (1%)
Profit before tax £1.333 billion n/m
Profit after tax £1.068 billion n/m
Basic earnings per share 10.8p 2%
Capital expenditure £1.882 billion 3%
Business units
Consumer £5.194 billion (1%)
Enterprise £3.055 billion (5%)
Global Services £2.196 billion (6%)
Openreach £2.356 billion n/m

n/m = not-meaningful

Verizon unveils mixed bag as media continues downward spiral

Verizon has released its third-quarter financials with the mobile business growing, broadband middling and media dropping.

Total revenues for the three-month period ending September 30 stood at $32.09 billion, a 0.9% increase year-on-year, though it has racked up $97.093 billion across 2019. As with previous quarters, there are positives to take away though the media business is still weighing heavy on the prospects of the group.

“Verizon continued its momentum in the third quarter by driving strong wireless volumes in both our Consumer and Business segments, while delivering solid financial results, highlighted by continued wireless service revenue growth, increased cash flow, and EPS growth,” said CEO Hans Vestberg.

As many would have imagined, little attention was given to the fragile media business. With each financial statement, the $5 billion bet on Yahoo’s media assets looks a little bit more like a waste of funds. Revenues in this business totalled $1.8 billion, down 2% percent year-on-year.

What was supposed to be the pursuit of alternative revenues in the ever-growing digital advertising segment is seemingly turning into nothing more than an Elephant’s Graveyard for assets in the digital economy. Aside from divesting interests in Flickr, Moviefone, MapQuest and Tumblr, Verizon is also reportedly on the search for a buyer for the Huffington Post. Perhaps executives have just had enough and are searching for a way to elegantly backtrack.

The failings of this business unit have been well-documented, so we do not want to invest too much time here, but Verizon was always going to fighting a losing battle. Winning a slice of the digital advertising profits requires out-of-the-box thinking, the ability to make money out of nothing. This is what Google, Amazon, Facebook and other innovative digital players can do.

But Verizon is not that type of business. It is a functional, engineering-focused, traditional beast. From a culture and risk-appetite perspective it was always going to struggle to compete with the lateral thinking Silicon Valley residents, and this is further evidence.

That said, when Verizon focuses on what it does best it can make money. The mobile business unit boasts of 193,000 retail postpaid net additions over the quarter and revenue growth of 2.6% year-on-year. Revenues for the broadband business are down year-on-year, but the number of Fios subscriptions are up 2.3%. It might not be as exciting to talk to investors about the world of connectivity compared to digital advertising, but it is what the company is very good at.

The team should of course attempt to secure new revenues to bolster the bottom line as the business of connectivity becomes increasingly commoditised but taking on the likes of Facebook and Google for digital advertising revenues always looked like too much of an ask.

Although this is a dampener for the Verizon business, there is more than a glimmer of hope around the corner; 5G.

There might be some questions regarding the coverage of its mmWave spectrum, but Verizon is making progress with 5G deployment. Alongside the financial results, the team also hit the go button for 5G in Dallas, Texas and Omaha, Nebraska. All of the launches are very limited from a coverage perspective, but momentum is gathering very quickly.

5G can form the catalyst for growth is the telcos force themselves through their own digital transformation. Let’s be clear, the telcos will not escape the utilitisation trends with 5G alone. The business needs to be transformed to offer new connectivity solutions to enterprise and consumer customers alike. Digital transformation is a more pressing concern for telcos than any other vertical.

But there is hope on the horizon. The lure of 5G contracts are proving to be tempting for consumers, which will help the bottom-line as data tariffs quickly surge towards unlimited as standard, and enterprise customers are enthusiastic about the connectivity euphoria. There are of course companies who want to steal the profits from the telcos, but the opportunity is still there.

Investors learn Silicon Valley can be volatile as Twitter tanks

Twitter’s share price was slashed by 18% as the market opened this morning, with the social media giant failing to find enough consistency to impress investors.

There was a brief glimmer of hope that Twitter might have been a company people could rely on, but rainclouds have once again emerged to spoil the parade. It certainly isn’t corporate doomsday for Twitter, but the management team will have to start ensuring some consistency if they want to remain in their current employment for the long-term.

Looking at the results, total revenues for the three-month period stood at $824 million, a 9% year-on-year increase, but short of the $876 million analysts estimated. Unfortunately for any optimists, the next quarter isn’t looking much better.

Twitter is forecasting revenue to be between $940 million and $1.01 billion for the next three months, down on the $1.06 billion which was estimated by analysts. Operating income is expected to be in the $130 million and $170 million range.

Although the steep decline in share price has largely levelled off, it does not make for comfortable reading.

The question which remains is what went wrong at Twitter? Looking at the materials presented during the earnings call, the management team is pointing to two areas. Firstly, seasonality. Twitter is suggesting fewer users were using the platform during the summer months than it was expecting, partly due to a lack of major events which were taking place over July and August.

Secondly, bugs in the legacy Mobile Application Promotion (MAP) product impacted the ability to target ads and share data with measurement and ad partners. The team also discovered certain personalization and data settings were not operating as expected. Twitter estimates the product issues reduced year-over-year revenue growth by 3 or more points in Q3.

Although these figures, this quarter and the next three months, are not the best it does not demonstrate the business is fundamentally flawed. This should not be seen as a company which will fall off a cliff, next year could be much more promising.

Firstly, the team is retiring legacy products and introducing new systems constantly, as well as creating more opportunities for those advertisers who are craving video engagement. This is an area which Twitter lags behind other social media platforms, though it could certainly catch-up.

Secondly, when you look at what is going to happen over the next 12 months, it would suggest there will be increased engagement from users and therefore increased opportunity for advertisers. In Europe, you have the UEFA European Championships, in the US, the Presidential Election and in Japan, the Tokyo 2020 Olympics. All of these events present major opportunities for Twitter to engage users.

Looking at user engagement, Twitter has decided to alter the way it reports figures, creating its own metric which will be known as ‘monetizable daily active users’ (mDAU). This could be a useful way to measure engagement, and the explanation below is taken from the letter to shareholders:

“Average mDAU for a period represents the number of mDAU on each day of such period divided by the number of days for such period. Changes in mDAU are a measure of changes in the size of our daily logged in or otherwise authenticated active user base. To calculate the year-over-year change in mDAU, we subtract the average mDAU for the three months ended in the previous year from the average mDAU for the same three months ended in the current year and divide the result by the average mDAU for the three months ended in the previous year.”

In short, it is the number of users which can be served ads each day. Using this metric, Twitter estimates it was able to serve ads to 145 million people each day, on average, which is a 17% increase on the same period of 2018.

The only issue with this metric is that it isn’t the most transparent when it comes to app downloads or concrete figures on daily usage. That said, according to data from Sensor Tower, it is still one of the most popular social media applications worldwide.

These results are not representative of a company which is in trouble, but more demonstrates the volatility of the internet segment. It was a bad three months, but that does not necessatily make Twitter a bad company. There are few companies which emerge from the garages of Silicon Valley which are genuinely reliable, but Twitter is one which will probably get better.

The fundamentals of the business are pretty sound. Assuming the team continue to improve the user experience and fix the bugs in the advertising machine, it will make money. Events across 2019 will attract more people only the platform, especially with social media likely to feature very prominently through the 2020 Presidential Election campaign. Perhaps the market needs to take a reality check on how much money it expects Silicon Valley to hoover up.

Microsoft revenues surge once again thanks to the cloud

This will officially be the last time we talk about Microsoft’s recovery, as it is unfair to undermine the continued progress and domination of the firm on the digital economy.

Everyone in the TMT industry knows the trouble Microsoft faced in bygone years, and everyone understands why the firm found itself in that position. But there is no need to discuss this aspect of the business anymore. CEO Satya Nadella has redefined the organization, leaving the troubles in the past. This business is a new beast and the latest financials prove it is one of the dominant forces in the digital economy.

“We are off to a strong start in fiscal 2020, delivering $33 billion in revenue this quarter,” Nadella said. “Our Commercial Cloud business continues to grow at scale as we work alongside the world’s leading companies to help them build their own digital capability.”

Fundamentally, Microsoft is a different business. In the 90s and 00s, Microsoft was defined by its dominance of the PC operating software world. Although this presence still exists today, the focus is on enterprise customers, however, the prospects of the business are perhaps more acutely focused on Azure, the cloud computing unit. The Microsoft of today and the troubled Microsoft of yesteryear are chalk and cheese.

Looking at the financials for the first quarter which were announced following the close of the market yesterday [23 October], they are once again pretty impressive. Total revenues increased 14% year-on-year to $33 billion, while operating income stood at $12.7 billion, up 27% from the same three-month period in 2018.

Revenues at Microsoft Azure increased 59% year-on-year, while the team has stated there has been a ‘material increase’ in the number of $10 million + contracts. The cloud is driving Microsoft forward, while the excitement around edge computing opens-up new prospects for the business.

This quarter also saw the team open two new datacentre regions, in Germany and Switzerland, taking the total up to 54 worldwide. Microsoft Azure is now available in 140 countries around the world, with the geographical footprint focused in Europe and North America.

Asia is one market where the team could grow further, and this might be a development worth keeping an eye on as more countries travel through the digital transformation journey. Nadella paid homage to a partnership with Indian telco Reliance Jio as a green-shoot of growth in the market.

Alongside the progress which is being made to expand the datacentre footprint of the business, the team is also pointing towards strategic partnerships with the likes of VMWare, Oracle and SAP for the added momentum in the cloud business.

“You’d actually see it in a couple of places [impact of partnerships], not just in Azure, which may in fact be the most logical extension,” said CFO Amy Hood during the earnings call.

“But, at the heart of this is making it easier, faster and more reliable for us to help customers move their estate to the cloud and to migrate that with confidence.”

This is perhaps one of the most exciting aspect of the cloud segment and will not just be limited to the success at Microsoft. There is still a huge amount of growth left to realise.

Many companies around the world will claim to be cultivating a cloud-first mentality, and many of these companies are migrating workloads across to the cloud. However, what has been achieved to date is only a fraction of the total. The cloud has matured, availability is increasing, and prices are decreasing. The likes of Microsoft, Amazon and Google might be hoovering up the profits, but there is still huge potential for growth.

Value Growth
Total revenue $33.1 billion 14%
Operating income $12.7 billion 27%
Net income $10.7 billion 21%
Productivity and Business Processes unit $11.1 billion 13%
Intelligent Cloud unit $10.8 billion 27%
More Personal Computing unit $11.1 billion 4%

 

Huawei brushes aside US sanctions with continued strong growth

US hostility seems to have had minimal effect on Chinese telecoms giant Huawei’s numbers, with strong growth reported across the board.

For the first three quarters of this year Huawei brought in CNY610.8 billion in revenue, which was a year-on-year increase of 24%. The first two quarters of the year recorded 23% revenue growth so, if anything, business is picking up. With the rollout of 5G ramping up it’s not surprising to see kit vendors’ revenue numbers pick up, but it’s nonetheless surprising to see how little impact all the US aggro seems to have had on the Huawei top line.

It should be noted that Huawei isn’t a public company, so there will be limited, if any, independent auditing of these numbers. Having said that the financial commentariat seems happy to take them at face value, so we will too. Huawei says the numbers are compiled in compliance with the International Financial Reporting Standard.

On the networking side Huawei now claims it has signed 60 commercial 5G contracts, which is ten more than a quarter ago. It also says it has shipped 400,000 5G Massive MIMO active antenna units, which seems like a lot. Huawei dropped some numbers about how many big companies are partnering with it over digital transformation, but the other key metric is cumulative smartphone shipments, which Huawei puts at 185 million units, an annual increase of 26% that indicates Q3 numbers of 67 million, which is impressive.

It’s hard to imagine, however, that the Android situation won’t have a profound effect on Huawei smartphone sales in the coming quarters, and the Q3 numbers could have been boosted by discounting to shift stock before that effect kicks in. Regardless Huawei’s numbers are holding up very well, considering the geopolitical headwinds it faces. Maybe this puts the presumed power of the US over global trade in a new perspective.

Micron earnings devastated by US/China conflict

Micron Technologies unveiled fourth quarter and full-year financials for 2019, with the on-going tension between the US and China shattering the spreadsheets with distressing effect.

The company, which is a US producer of advanced semiconductor products, is one of the unfortunate victims of the US/China trade war. Like many other technology companies who are a supplier to Huawei, the on-going saga is having a catastrophic impact on financials. Unless there is a resolution on the horizon, Micron could look like a very different business in the very near future.

“We have applied for licenses with the Department of Commerce that would allow us to ship additional products, but there have been no decisions on licenses to date,” said CEO Sanjay Mehrotra during the earnings call.

“We see ongoing uncertainty surrounding US China trade negotiations. If the Entity List restrictions against Huawei continue and we are unable to get licenses, we could see a worsening decline in our sales to Huawei over the coming quarters.”

A word of warning for those who do not like are of a delicate disposition, the numbers being quoted below are not pretty.

Total revenues for the final quarter of 2019 stood at $4.87 billion. This is a slight increase quarter-on-quarter, but down roughly 43% compared to the $8.44 billion brought in for Q4 2018. Net income came to $561 billion for the three-month period, compared to $4.33 billion in the same period of 2018.

For the full-year, revenues stood at $23.406 billion compared to $30.391 billion across 2018, while net income dropped to $6.313 down from $14.135 billion.

President Donald Trump might well be pursuing national security, assuming you believe the statements, though that will come as little comfort for any of Micron’s employees, investors or suppliers.

Mehrotra has attempted to put as positive a spin as possible on these results, but it is a very difficult sell. The markets are looking positive for the business if you ignore the omission of Huawei as a customer, but it is very difficult to avoid the fact the company will make less money if it is not allowed to do business with the Chinese firm.

What is worth noting is that the business is slightly prepared for this nightmare scenario. The team have put in the work to prepare the organization, and as such, Micron actually delivered beyond analyst expectations for the quarter. That said, with share price declining 9.5% since the earnings call, it is clearly not a favourable position.

And Micron is not alone in this sticky position.

Skyworks Solutions, a supplier of semiconductors to Huawei, reported revenues of $767 million during the latest financial results, compared to $894.3 million in the previous year. The decision to ban work with Huawei only came a few weeks prior to this earnings call, and we suspect the financial hole will be substantially bigger come the next time Skyworks Solutions addresses investors.

Finisar is another US firm which saw revenues decrease to $285 million from $317.3 million year-on-year owing to challenging macro-economic environment. Qorvo is one firm which has seemingly survived the first waves of conflict, though it is forecast to have an impact soon enough.

“Ultimately, we were able to begin shipments of certain products [To Huawei] late in the quarter and we have applied for a license to expand the products we can sell,” Qorvo CEO Robert Bruggeworth said during the earnings call in August.

“We will continue to support them consistent with all applicable legal requirements. Finally, as our June quarter and September guidance demonstrate, we are effectively navigating a challenging environment and our products and technology continue to support solid sustainable results.”

Qorvo is forecasting revenues of $745 million to $765 million during the three-month period we are currently in. This would compare to $884.4 million which was brought in for the same quarter of 2018, prior to the Huawei misery.

And while these companies are applying for licences to work with Huawei while simultaneously praying for an end to the conflict, the chaos might continue well into the future.

Huawei founder Ren Zhengfei has recently said Huawei has begun the production of 5G base stations which do not contain any US component.

“We carried out the testing in August and September, and from October on we will start scale production,” Ren said.

This is something which should be viewed as worst-case scenario for everyone involved from the US side of the conflict. If you are of a sceptical nature and believe the tension has been heightened by Trump as a means to demonstrate US power to gain an edge in trade talks, Huawei surviving is a bad outcome. Another bad outcome is Huawei surviving and then restructuring its supply chain to removal any US suppliers.

Ren has initially said it would start production of base stations free of US components immediately, targeting 5,000 a month. Huawei is currently targeting the production of 600,000 base stations this year, scaling up to 1.5 million in 2020, though it is unknown how many of these will be with or without US components.

If Huawei can operate without any US suppliers in the supply chain, then it becomes a much more stable company. It is also an outcome which would please the Chinese Government considering the ‘Made in China 2025’ plan. This strategy aims to move China away from being the world’s ‘factory’ and move to producing higher value products and services.

And finally, onto President Trump, this is a disastrous outcome. The White House perhaps implemented this aggression towards Huawei to make the company falter and demonstrate power. If Ren is to be believed, Huawei will have negotiated the turbulent times and come out the other side without the need for US suppliers. The quality of the supply chain alternatives remains to be seen however.

Prior to this chapter of the saga, US firms were making profits from Huawei’s success; this might not be the case anymore.

ZTE gains confidence on the back of solid earnings growth

Perhaps ZTE has just been enjoying an uncomfortable silence and an expensive milkshake in recent months, but its financials for the first half of 2019 are screaming for attention.

It is quite difficult to measure the performance of the business looking at the financials alone, ZTE found itself in the Trump crosshairs in H1 2018, though the team is hyping itself up now, seemingly to gain attention in a very noisy segment. ZTE is often overlooked when considering the major network infrastructure vendors, but it certainly does warrant mention.

Revenues for the first half of 2019 stood at roughly $6.23 billion, up 13.1% year-on-year, profits increased a massive 118% to $210 million. The team is now forecasting profits between $530-640 million for the first nine months of the year.

These numbers might sound very impressive, but it was at this point last year when President Trump and his administration targeted ZTE. In May 2018, ZTE announced its major operating activities had ceased after the US Department of Commerce’s Bureau of Industry and Security (BIS) placed an export ban on the vendor. Without the US complement in the ZTE supply chain, the firm was almost extinct, though concessions were made and now it appears it is business as usual.

This is why the year-on-year gains are largely irrelevant. ZTE was a shell of a company at this point last year, fighting for its very survival.

That said, the company is surging towards the 5G finish line just like its rivals, and now it needs to convince potential customers it is a stable, reliable and innovative partner. Being selected to supply equipment to any telco will be after intense scrutiny, and thus the charm offensive has begun.

First of all, lets start with the R&D spend. ZTE has suggested it has spent roughly $900 million on R&D for the first six months of 2019, a 14.5% ratio of the total revenues for the period. This is an increase from the 12.8% share of the same period of 2018, with the new figure just ahead of the 13.8% share of revenues (estimate) Huawei allocated to R&D last year. The domestic rival has promised to increase this figure by 15-20% for 2019, though the overall percentage will not be known until the full year financial figures are known.

In comparison, Ericsson said it attributed 18.5% of net sales revenue to R&D over the course of 2018, a figure which increased to 18.7% by the end of the first six months of 2019. At Nokia, 18.4% of net sales revenues were directed towards the R&D department for the first six months of this year.

This part of the business has largely been focusing on the development of basic operating systems, distributed databases and core chipsets most recently. The company has completed the design and mass production of the 7nm chipsets, while it is currently undergoing the R&D phase for 5nm chipsets.

All this work has resulted in 3,700 5G patents being granted to the firm, though this number might notably increase in the near future. ZTE has also said it is partnering with various Chinese universities to source 5,000 new employees to bolster the R&D ranks. Once again, these are numbers which are being cast into the public domain to enhance the reputation of the business at a time where vendors are facing scrutiny at an unprecedented level.

Of course, when we are talking about creating a perception of stability and reliability, as well as increased scrutiny, you have to discuss security.

ZTE might have managed to avoid US aggression over the last couple of months, Huawei has been the primary target, but as a partly state-owned entity, such questions will never be that far away. This is where the cybersecurity centres will play an important role.

Opened in Nanjing, Rome and Brussels, the cybersecurity centres will allow potential customers to test and validate the security credentials of the firm prior to installing any equipment or software in the network. Some will not be convinced this is a fool-proof way to ensure resilience, though it is an act of transparency which the industry and governments have been crying out for.

The result of this work is 60 memorandums of understanding (MoU) with telcos around the world, 50 5G demonstrations in 20 industry verticals, 300 strategic collaborations and 200 5G products to date.

It is often easy to overlook ZTE and designate the firm as a poor man’s version of 5G network infrastructure, but the numbers justify inclusion at the top table. The challenge which ZTE now faces it making prominent strides into Western markets, the very ones which are getting twitchy over security and price today.

Is Xiaomi filling a Huawei-shaped hole in the smartphone market?

Huawei might be suffering in today’s political climate, but every action gets a positive and negative reaction and could Xiaomi be benefitting from its rival’s misery?

The Chinese challenger brand might have missed on market expectations for revenue, but it is not the worst set of financial results you have ever seen. Looking at the most simplistic measure of a company, it made more money than last year, brought in more profits and sold more products; not too bad.

“Thanks to the Xiaomi relentless efforts, we have managed to achieve solid growth in our businesses, posting a consensus-beating profit and becoming the youngest Fortune Global 500 company in 2019, despite global economic challenges,” said Xiaomi CEO Lei Jun.

“Our performance is testament to the success of our ‘Smartphone + AIoT’ dual-engine strategy and the Xiaomi business model. Looking ahead, we will continue to strengthen our R&D capabilities and investments so as to capture the great opportunities brought by 5G and AIoT markets and strive towards ongoing achievements for the company.”

Financial analysts will be pouring over the spreadsheets to understand why Xiaomi seemingly missed market expectations, but let’s not forget, the smartphone market is in a notable slump right now. Sales are slowing and the 5G euphoria is yet to hit home to compensate. No-one is immune from overarching global trends.

However, there is a glimmer of hope on the horizon for the majority of smartphone manufacturers; there are gains to be made from the Huawei misery.

According to the latest smartphone shipment numbers from Canalys, Huawei’s smartphone shipments in Europe have declined year-on-year by 16%, while Samsung and Xiaomi have grown their numbers by 20% and 48% respectively. Other factors will contribute to the increase, though there will be former-Huawei customers who are seeking alternatives brands at the end of their replacement cycle.

Huawei is in a bit of a sticky situation right now. Firstly, its credibility has been called into question, thanks to President Trump’s trade war, while its supply chain is suffering due to the tariffs from the aforementioned trade war. The supply of critical components is under threat, as are security updates from Google’s Android operating system. Both of these concerns will impact consumer buying decisions.

Looking at Huawei’s financial figures, the consumer business unit is still on the rise, revenues were up 23%, though when you take into consideration the analyst estimates, it would seem these gains are from the domestic market. If Xiaomi can avoid collateral damage, it could benefit from Huawei’s alleged downturn in the international markets.

This does seem to be the case. For the first half of 2019, Xiaomi’s revenues increased 20.2% year-on-year to roughly $13.55 billion. The international markets, an area of significant potential for Xiaomi, accounted for 42.1% of the total, compared to a 36.3% proportion in the same period of 2018.

The gains in Europe have been highlighted above, though the Indian market is looking like a very profitable one. IDC estimates suggest Xiaomi is still leading smartphone shipments in India and has done for the last eight consecutive quarters. Estimates from eMarketer state smartphone penetration will grow to 29% of the Indian population in 2019, year-on-year growth of 12.5%. There is still a massive amount of growth potential in this market which is undergoing its own digital revolution.

Another area which has been highlighted for gains by the Xiaomi management team is the increasing diversity of the product portfolio.

Aside from the Mi 9 series and Redmi Note 7 series, the team launched the new K20 flagship during the second quarter, with shipments exceeding one million in the first month. The CC Series has also seemingly gained traction with female audiences, while the Mi MIX 3 5G was one of the first 5G compatible devices to hit the market. Numerous telcos have partnered with Xiaomi for this device, suggested the team is taking the shotgun approach as opposed to signing exclusive partnerships.

What is clear, Xiaomi is a smartphone manufacturer which is heading in the right direction. However, the gains could be increased should the misery continue for Huawei.