TBR 4Q10 Huawei Report

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Technology Business Research is a different kind of research company. Our bottoms-up approach provides a look at the technology industry unlike anything youve seen before. We analyze company performance in professional services, networking and mobility, computing and hardware, and software on a quarterly basis, leveraging our data to create industry benchmarks and landscapes that provide a business perspective on leaders and laggards and their business plans. We are experts in the business of technology.

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<ul><li>1.NETWORK BUSINESS QUARTERLYSMHuaweiFourth Calendar Quarter 2010Fourth Fiscal Quarter 2010 Ended Dec. 31, 2010TBR OUTLOOK - POSITIVE TBR SCORE (0-10 SCALE) 4.79Publish Date: March 21, 2011Author: Chris Antlitz (chris.antlitz@tbri.com), NBQ AnalystContent Editor: Michael Sullivan-Trainor, NBQ Executive Analyst TBRT E C H N O L O G Y B U S I N E S S R ES E AR C H , I N C .</li></ul><p>2. Contents TBRCompany Analysis Company Data Models3 Executive Summary24 Income Statement7 Strategy Overview25 Balance Sheet11Corporate SWOT Analysis26 Revenue Model14Financial Model Strategy 27 Geographic Model17Go-to-Market &amp; Product Strategies28 Operating Expense Model18Alliance &amp; Acquisition Strategies29 Forecast Model19Geographic Analysis30 Financial Graphs21Resource Management Strategy 33 Go-to-Market &amp; Resource Mgmt. Graphs22Future Outlook 34 Acquisitions Table 35 Strategic Alliance and Partnerships Table 37 Product Announcement Table 40 Customer Deals Table 50 Facilities Table 52 Management Table 53 About TBR2 Huawei 4Q10 | Network Business Quarterly2011 Technology Business Research, Inc. 3. Executive Summary TBRHuawei successfully weathered the decline in Chinese spend for 3Grollout in 2010, making up for it with solid execution in EMEATBR Position:Huawei is striving to drive software and servicesTBRHUAWEI REVENUE BY REGION $454revenue to maintain its lofty growth rate. $28,000 North TBR estimates gross margin rose 40 basis points $24,000 $408$9,912America Revenue in Millions from 2009 to 40%, as sales mix moved toward $20,000 $231EMEA higher-margin software, services and next- $6,500 $16,000$6,040 $1,820 generation infrastructure. $146 $923CALA $12,000 $4,399 $3,843 $6,014$1,539 The device business rebounded sharply fromAPAC (ex-$8,000$900 2009 on strong unit shipments and a more $5,743 China) $3,799 $10,147$9,800 favorable mix skewed toward smartphones. $4,000$4,518 China $3,595 Huawei benefited from the revival in optical $02007 20082009 2010 Est. transport spend, but TBR believes the vendor SOURCE: TBR ESTIMATES AND HUAWEI trailed Alcatel-Lucent and Ciena in the space in 2010. We believe Huawei is exercising its generousHuaweis Corporate Strategies credit lines with Chinese banks to offer attractive financing to cash-strapped operators in Execute on three-pronged security plan in U.S. to developing countries. As such, TBR estimates assuage government fears Huawei will grow sales faster than peers in CALA Triple terminal sales within three to five years by and Africa, where access to capital is scarce, manufacturing and bringing to market low-cost especially for large-scale deployments.smartphones and tablets sporting the Android OS Huawei is using resource localization to establish Establish leadership position in 4G, particularly TD-LTE hubs in key markets and make customers more Invest in software and services assets to better comfortable using a foreign vendor for their compete against Ericsson, Alcatel-Lucent, and Nokia network needs. Siemens3 Huawei 4Q10 | Network Business Quarterly 2011 Technology Business Research, Inc. 4. Executive Summary TBRThough Huawei has won the largest number of 4G contracts thus far,rivals Alcatel-Lucent and Ericssons LTE contracts are worth moreQuarterly Segment Performance 2010GrowthSegment Key Changes &amp; DriversRevenue Trends to MonitorY/Y Estimate Huaweis launch of a SingleRAN thatHuawei is ahead of rivals in number supports both TD-LTE and WiMAX could beof 4G deals signed, but the value of a hot seller for WiMAX operators looking forthose deals pales in comparison to $8.5a relatively inexpensive way to migrate toWirelessthe lucrative LTE contracts won bybillion34.3% LTE. Some examples include Clearwire andAlcatel-Lucent and Ericsson for Yota. This could also expand the TD-LTEAT&amp;T, Verizon and other Tier 1 ecosystem, which is currently running theoperators. FDD-LTE iteration of the 4G technology.Huawei continued to grow FTTxdeployments with numerous deals. Huawei has strong FTTx offerings andIn 2H10 alone, Huawei won twoprovides reliable, quality accessFixed deals for FTTH deployments, one$2 billion 27.7%equipment at better prices thanwith Telekom Brunei Berhad incompetitors.Brunei and the other with Qtel in Huawei also leads in GPON and EPON.Qatar. Huawei will benefit from BTs decision toThe largest optical deals Huawei increase fiber investment by 1 billion ($1.5signed in 2H10 were with China $5.8 OpticalMobile and PCCW for 40G billion12.9%billion) through 2015, as the vendor has been a key supplier of optical access andsolutions. transmission equipment to BT since 2008.4 Huawei 4Q10 | Network Business Quarterly2011 Technology Business Research, Inc. 5. Executive SummaryTBRData was the fastest-growing segment in 2010, as operators boostedcapacity on their networksQuarterly Segment Performance 2010GrowthSegment Key Changes &amp; DriversRevenue Trends to MonitorY/Y Estimate Demand for routers was strong in 2010, exemplified by MegaFons purchase of an Operators are stressing efficiency on a IP/MPLS solution from Huawei in cost per bit basis, as revenue derived October.$2.4from data is growing at a far slower rateDatabillion57.1% than data usage. This trend bodes well Operators are allocating a larger portion of their capex budgets to IP to bulk up for sales of Huaweis SingleRAN, network capacity to contend with rising backhaul and IP solutions. data usage. Huawei realized strong growth across rollout, maintenance, professional andHuawei is bulking up its services arm to managed services. Being selected forbetter compete against heavyweightsServices end-to-end network deployments and/or Ericsson, Alcatel-Lucent and Nokia upgrades is helping Huawei drive$4.9&amp; billion34.5%Siemens for lucrative outsourcingSoftware incremental growth in services. contracts; however, it will be some time Traction in software remains elusive, before Huawei can undertake a mega- though Huawei is investing aggressively services deal. in its portfolio. IDEOS will be offered by carriers and IDEOS smartphone series launched in $4.5retailers in more than 70 countries inTerminalsSeptember and sold 1 million units in firstbillion21.6% 2011, helping Huawei quickly gain two months. market share.5Huawei 4Q10 | Network Business Quarterly 2011 Technology Business Research, Inc. 6. Executive SummaryTBRHuaweis balance sheet is stretched compared to peers, reflecting liberalcredit policies, inefficient inventory management and a rising debt load CALENDAR QUARTER RESULTSTBR SCORING SUMMARY:TBRCompanyAverage in Standard 4Q09 1Q10 2Q10 3Q10 4Q10FINANCIAL METRICSTBR ScoreFigure Class Deviation/2Fi na nci a l Model Stra tegy: 5.67 5.55 5.64 5.74 5.80Revenue Growth Yea r-to-Yea r8.44 28.3%9.0%5.6%Go-to-Ma rket &amp; Servi ces Stra tegi es : 3.27 3.21 3.35 3.51 3.35 Revenue/Empl oyee3.53 $ 229,694 $ 383,236$104,419Res ource Ma na gement Stra tegy:5.29 4.92 4.93 5.27 5.24 Gros s Ma rgi n5.52 40.0% 37.3%5.2%TOTAL AVERAGE TBR SCORE: 4.74 4.56 4.64 4.84 4.79 SG&amp;A a s % of Sa l es4.74 17.9% 17.3%2.2%R&amp;D a s % of Sa l es 6.65 10.0% 13.1%1.9%Huawei has the weakest days sales outstanding Opera ting Ma rgi n6.27 11.9%6.4%4.3%metric among its peers due to its liberal creditDa ys Ca s h Outs tandi ng 3.9870.60115.04 43.59Total As s et Turns6.991.160.910.13policies. Huawei routinely accepts IOUs fromCurrent Ra tio 3.781.481.760.23customers to boost sales and encourageDebt/As s ets2.160.690.520.06investment. We believe this practice couldReturn on As s ets 8.11 14.2%5.6%2.8%weaken Huaweis balance sheet if cash-Return on Equi ty9.42 45.6% 13.3%7.3%strapped operators struggle to pay back TOTAL AVERAGE TBR SCORE5.80outstanding debt. CompanyAverage inStandard KeyGO-TO-MARKET &amp; SERVICES METRICSTBR ScoreFigureClassDeviation/2Network/Comm. Equi pment Ma rket Sha re5.37 13.7% 12.2% 3.9% Represents an area where Huawei is Mobi l e Phone Ma rket Sha re3.662.2% 10.2% 6.0% currently challenged versus peers. Da ys Sa l es Outs tandi ng1.01 154.9680.19 18.74 Represents an area where Huawei is TOTAL AVERAGE TBR SCORE3.35 outperforming its peers. Represents an area where Huawei isCompanyAverage inStandard neither significantly outperforming norRESOURCE MANAGEMENT METRICSTBR ScoreFigureClassDeviation/2 underperforming its peers. Inventory Turns /Yea r 3.996.218.13 1.90Fi xed As s et Turns /Yea r6.4819.1114.59 3.04 VENDOR PERFORMANCE COMPARED TO PEERS IN TBRS NETWORKTOTAL AVERAGE TBR SCORE5.24 BUSINESS QUARTERLY VENDOR BENCHMARK 6 Huawei 4Q10 | Network Business Quarterly 2011 Technology Business Research, Inc. 7. Strategy OverviewTBRHuaweis three-pronged security strategy is a good first step to reducebarriers to expansion in the United States marketFunction Key Strategies TBR Assessment Build on initial success Huawei has yet to land an equipment contract with a Tier 1 in North America to operator in the United States, though the vendor is findingOverallbecome a key suppliersuccess among Tier 2 and 3 companies. to network operators With security clearance in hand, Huawei can realize the full Grow business in India potential of its extensive resources in India, which include a by localizing presence skilled local workforce and domestic manufacturing and R&amp;Dassets. Huaweis plan includes establishing a national security committee Employ three-prongedheaded by Huawei CTO Matt Bross, using third-party test labs to security strategy to check Huaweis source code, and using U.S. citizens to deliver and allay U.S. concernsinstall Huawei equipment. Grow sales 20% in 2010 Huawei exceeded its sales target for 2010 by $1.8 billion, and TBR by focusing on estimates broad sales growth in all of Huaweis operatingFinancialinternational expansionsegments. TBR estimates Huawei boosted its R&amp;D spend to 10% of revenuein 2010 after spending just under 9% of sales in the previous two Invest 10% of revenue years. The jump reflects confidence in the global economic in R&amp;Drecovery and a strong push into services and software. Huawei isalso investing heavily in TD-LTE.7Huawei 4Q10 | Network Business Quarterly2011 Technology Business Research, Inc. 8. Strategy OverviewTBRHuawei is investing heavily in North America and India to support growth Function Key StrategiesTBR Assessment Huawei won the largest share of the LTE and WiMAX contractsawarded in 2010 and is positioning itself to become a leader in Establish leadership Go-to- TD-LTE, the 4G technology of choice for Chinese operators. The position in 4G (WiMAX Market vendor aims to double its commercial LTE contracts from 18 in and LTE)2010 to 36 in 2011 and expects LTE-related revenue will becomea meaningful contributor to overall revenue by 2014. Selling low-cost Android powered devices via carriers will helpHuawei quickly gain market share in smartphones and tablets. Leverage Android toiPad and Xoom are not affordable by the general population of gain traction in most countries and offerings by Samsung and LG seek to capture smartphone and tabletthe midmarket. This leaves the low tier up for grabs, a space marketsHuawei thrives in due to its low-cost operating structure andresistance to pursuing expensive advertising programs. Huawei opened an R&amp;D center in Ottawa in August the vendors Establish R&amp;D centers insecond R&amp;D facility in North America. This base of operations in R&amp;D and strategic cities toCanada will help Huawei develop closer ties with its local Deliveryleverage local talentcustomers, including BCE, SaskTel and TELUS as well as help the Strategypoolscompany enter the good graces of the Canadian government. $2 billion investment in Using a localization strategy, Huawei is creating a stronghold in India will improve India while improving its reputation with the Indian government. prospects in the country8Huawei 4Q10 | Network Business Quarterly 2011 Technology Business Research, Inc. 9. Strategy Overview TBRLocalization is central to Huaweis India strategy a move that will helpimprove its reputation with government officials while saving moneyTBR Assessment of Huaweis Resource Management Strategy With security clearances in hand and 3G deals secured, Huawei unveiled an India investment plan worth $2 billion over the next five years. The strategy is to quickly build a standalone base of operations in India. Huawei will leverage the talent pool and localize service delivery and equipment manufacturing to establish a stronghold in the country, which will alleviateHuaweis government fears and help Huawei keep costs down.$2 billion A manufacturing hub will be built near Chennai for $500 million. It will produce networkinvestment showsinfrastructure equipment for India and export to neighboring countries.the vendor views The existing R&amp;D center in Bangalore will expand to house 3,000 engineers, up from thethe Indian marketcurrent 2,000.as a strategic,long-term Partnerships with Indian IT firms will be funded to better approach and offeropportunity differentiated solutions to the market. R&amp;D budgets will rise to take advantage of the highly educated talent pool. Training centers will be established to coach new hires and channel partners. These investments will boost Huaweis India headcount from 6,000 at the end of 2010 to over 10,000 by the end of 2011, with more than 60% to be local hires.9 Huawei 4Q10 | Network Business Quarterly 2011 Technology Business Research, Inc. 10. Strategy OverviewTBRHuawei will come to dominate the low-end smartphone and tabletmarkets in 2011 TBR Assessment of Huaweis Go-to-Market Strategy Huawei is clearly focused on locking up the low-tier smartphone and tablet markets. Thestrategy is to mass-produce a limited number of models that are widely affordable andappealing to many demographics. Huawei is able to sell its devices at a discount Bringing Android-compared to rival offerings because of its low-cost operating structure and resistance to poweredexpensive advertising campaigns. Instead, Huawei prefers to let carriers and retailers smartphones andhandle the marketing portion and sweeps those cost savings to the bottom line, which tablets at a fractionhelps protect margins. of the cost of rivals Huawei is also making inroads to big box retail stores like Best Buy and Wal-Mart. The offerings to U.S.popularity of Android smartphones and tablets is pushing retailers to offer the widest shores will resonate and most competitive selection of mobile devices. with mass market consumers, helping TBR believes ZTE will be Huaweis only significant competitor in the low-end space. make Huawei aApple clearly owns the high end and RIM, Samsung, Nokia, Motorola and others are all household name jockeying to grab share in the mid- to high-end segments. With competitors focused on balancing ASP and volume, Huawei is able to move in andquickly ramp-up unit shipments; however, TBR forecasts Huawei Device to have anexcellent year in 2011.10Huawei 4Q10 | Network Business Quarterly2011 Technology Business Research, Inc. 11. Corporate SWOT Analysis TBRNokia Siemens is Huaweis biggest threat from the West, as it...</p>