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Huawei Analyst 4Q07(TBR)

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  • 1. TBR T 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 . Huawei Technologies Co., Ltd. Fourth Calendar Quarter 2007 TBR OUTLOOK - POSITIVE Fourth Fiscal Quarter 2007 ended December 31, 2007 Publish Date: April 10, 2008 Author: Kate Price (kate.price@tbri.com), NBQ Analyst and Michael Sullivan-Trainor, NBQ Executive Analyst Content Editor: John Byrne, NBQ Director NETWORK BUSINESS QUARTERLYSM
  • 2. TBR TBR NETWORK BUSINESS QUARTERLY Table of Contents Executive Summary ..........................................................................................................................3 TBR Position Statement......................................................................................................................3 Strategic Overview............................................................................................................................4 Strategic Objectives ..........................................................................................................................6 Continue Step-by-step International Expansion ....................................................................................... 6 Become a Top Global Telecom Equipment Provider .............................................................................. 7 Corporate SWOT Analysis...............................................................................................................8 SM Strength: International Expansion Provides Company with Access to Many Customers....................... 8 Weakness: Ties to the Chinese Government Could Limit International Investment Opportunities....... 8 Opportunity: Expand Rapidly into High-growth Geographies ................................................................ 9 Threat: Looming U.S. Recession Could Have a Global Effect and Negatively Impact Product Sales 10 Financial Model Strategy ...............................................................................................................11 Alliance & Acquisition Strategies ..................................................................................................14 HUAWEI TECHNOLOGIES CO., LTD. Go-to-Market & Product Strategies..............................................................................................16 Customer & Vertical Market Strategies .......................................................................................18 Geographic Analysis .......................................................................................................................21 Resource Management Strategy ....................................................................................................22 Future Outlook................................................................................................................................23 12-Month and Long-term Outlook....................................................................................................23 Income Statement............................................................................................................................24 FOURTH CALENDAR QUARTER 2007 TBR’s Network Business Quarterly (NBQ) Service NBQ provides coverage of the leading end-to-end communications solutions and professional services providers in the network, telecom and mobility value chains: Alcatel-Lucent, Alcatel-Lucent Services, Cisco, Cisco Services, Ericsson, Ericsson Global Services, Huawei, Motorola, Motorola Networks Services, Nokia, Nokia Siemens Networks, Nokia Siemens Networks Services, Nortel, Nortel Global Services, Samsung and ZTE. Additionally, NBQ provides coverage of Accenture, EDS, HP and IBM from a telecom, network and mobility value chain perspective, as well as the leading U.S. mobile operators: AT&T, Sprint Nextel, T-Mobile USA and Verizon Wireless. The service also includes quarterly benchmark reports, analyst access and custom consulting. TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 2 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.
  • 3. TBR TBR NETWORK BUSINESS QUARTERLY Executive Summary HUAWEI TECHNOLOGIES CO., LTD. TBR Position Statement ( = negative, = neutral, = positive) Huawei continued to advance its position as one of the largest telecom equipment suppliers in 4Q07; during the quarter, the company grew sales at a rate faster than the market and dramatically faster than any of the big three market leaders, Ericsson, Alcatel-Lucent and Nokia Siemens SM Networks. While the privately held company has not issued 4Q07 financial data, Huawei did report $16 billion in orders for the full-year 2007, which TBR believes is equivalent to $11.7 billion in revenue for a 45% increase in sales. These results compare to less than 10% revenue growth for the big three. To achieve these results, Huawei continues to establish itself as a complete solutions vendor as well as a low-cost provider of telecommunications equipment. Over the years, the company’s investments in R&D have paid off, as it is gaining recognition for its product quality. Huawei’s ability to win large international deals has positioned it as a disruptive player in the market, challenging incumbent suppliers within their own installed bases. The company’s international expansion strategy began in the APAC region, where it targeted emerging markets with its HUAWEI TECHNOLOGIES CO., LTD. low-priced products. A strong track record in emerging markets is allowing Huawei to spread across the globe into more developed countries. Target growth regions for the company include mature markets, such as in Western Europe and the United States, and India, in which the telecom market is experiencing rapid growth. TBR believes Huawei is making a significant impact on the infrastructure market, leading with a low-cost strategy and following up with strong product and customer support. In addition, as a new entrant in developed markets, Huawei has made significant inroads with Western European service providers by applying its research and development and customer support strengths to meet customers’ technical requirements in a more timely fashion than the competition. Huawei predicts its orders will grow to $22 billion for 2008, a 37% year-to-year increase that TBR believes would provide sales of $16 billion. We believe the company is well-positioned to achieve its goal through its participation in rapidly developing mobile infrastructure, optical and broadband access markets. The company has positioned itself for success through supplying end-to-end solutions as well as expanding its international footprint to increase sales. TBR anticipates this ongoing international expansion will be costly for the company and could put downward pressure on margins. We also believe Huawei’s commitment of 10% of total revenue to R&D will be tested in upcoming quarters, as the company’s margins will already be under pressure from broad international expansion. FOURTH CALENDAR QUARTER 2007 Huawei’s 4Q07 results were marred by news concerning the company’s attempt to attain a 16.5% minority stake in 3Com Corp. The unsuccessful effort to acquire 3Com with Bain Capital Partners was stymied by Huawei’s close ties with the Chinese government, and an apparent unwillingness to provide transparency regarding its government connections. An investigation into the deal was performed by the Committee on Foreign Investment in the United States (CFIUS), which ultimately rejected the deal, citing a potential threat to U.S. security since 3Com provides the U.S. government with certain security solutions. TBR believes Huawei’s ties to the Chinese government could limit the company’s ability to make future acquisitions with Western countries, and may limit international growth opportunities. TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 3 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.
  • 4. TBR TBR NETWORK BUSINESS QUARTERLY Strategic Overview Huawei Technologies achieved its bid to become a top-tier (among the largest five or six) telecom supplier based on its 4Q07 revenue. The company has moved to this position based on a combination of business model, regional and product category strengths. Huawei’s business model is based on an approach to the equipment business of reducing product costs by applying plentiful inexpensive labor at the most strategic point of the technology. This cost targeting has been applied to reducing baseline prices for fixed and wireless access products, as well as providing specific “customized” solutions to address individual service provider needs. Lowering the cost of the base products as well as the cost and time to market for customization has been a highly successful strategy – first in emerging market environments, and more recently in developed SM markets. Service providers, especially in Western Europe, have brought Huawei into strategic deployments to reap the benefits of the cost advantages through lower capex and pressure incumbent suppliers to lower their prices. Huawei has also grown through the fast expansion of emerging markets from its early presence in China, Asia, the Middle East and Africa. TBR HUAWEI'S GROWTH AND PROFITABILITY Revenue Growth Year-to-year 60% HUAWEI TECHNOLOGIES CO., LTD. 15% 50% Profitability 40% 10% 30% 20% 5% 10% 0% 0% 2005 2006 2007 Est. Operating Margin Net Margin Revenue Growth Year-to-year SOURCE: TB R A ND HUA WEI. Product categories representing Huawei’s strengths include optical transport, where the company leveraged market growth to achieve $800 million in 4Q07 sales, second only to Alcatel-Lucent’s $1 billion for the quarter. Growth in new technologies (Huawei’s specialty) such as next-generation SDH and SONET transport, as well as WDM, led the way. The rebound of Optical has made it one of the few product categories whose next-generation sales growth has seen volume high enough to overcome the issues suppliers have had with declining legacy equipment sales. Similarly, Huawei challenged Alcatel-Lucent in DSLAMs (specifically IP DSLAMs), another next-generation FOURTH CALENDAR QUARTER 2007 technology. In 3Q07 Huawei achieved 32% market share by shipping 70 million ports. In 4Q07, Huawei also achieved a new milestone in wireless radio access networks; it garnered more contract awards for mobile base stations than any other supplier, edging out Ericsson and Nokia Siemens Networks with 34% of the contracts. In previous quarters, Alcatel-Lucent led base stations contract wins; however, Ericsson and Nokia Siemens remain the overall market leaders based on installed base and volume. From a volume perspective, Huawei attained the No. 3 position, achieving twice the revenue in 4Q07 as it did in the previous quarter. The majority of the products were WCDMA/HSDPA equipment, also next-generation technology. Going forward, Huawei faces the challenge of executing the expansion contracts it has been awarded by large mature market suppliers such as T-Mobile International AG, Telecom Italia Mobile and Vodafone Group. The recent wins join British Telecom and contribute to Huawei’s TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 4 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.
  • 5. TBR TBR NETWORK BUSINESS QUARTERLY strategic position as a broadband access provider in Western Europe. Still, the length of time Huawei has operated in the region is relatively short compared to Ericsson, Alcatel-Lucent and Nokia Siemens Networks, so the supplier must work hard to continue to demonstrate its credibility at execution as well as pricing. Meanwhile, Huawei is increasingly seeking ways to expand its portfolio opportunities by building new business areas to become a more successful end-to-end supplier. In services, for example, the company recently announced a three-year managed services contract with Mobily in Saudi Arabia including managed network operations, back office, field operations, network optimization and spare parts management. Huawei will also be responsible for multivendor equipment, including all spare parts management and third-level support. The company claims a 335% increase in managed service revenue for 2007, driven by its proposition to save customer opex. SM HUAWEI TECHNOLOGIES CO., LTD. FOURTH CALENDAR QUARTER 2007 TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 5 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.
  • 6. TBR TBR NETWORK BUSINESS QUARTERLY Strategic Objectives Huawei Technologies’ Corporatewide Goals • Continue step-by-step international expansion (4Q07 report) • Become a top global telecom equipment provider (4Q07 report) • Transform the organization into world-class company (1Q06 report) • Focus significant resources on 3G technology and winning mobile operator deals (4Q06 report) • Focus on customer evolution to all-IP network (2Q07 report) • SM Drive growth through a customer-focused strategy: (4Q06 report) • High quality • Excellent service • Low operating cost • Focus on customer requirements and customized solutions SOURCE: TBR. CONTINUE STEP-BY-STEP INTERNATIONAL EXPANSION Huawei is looking to fuel 2008 growth through international expansion into developed markets. The company’s initial global expansion began a decade ago in the APAC region, where the vendor HUAWEI TECHNOLOGIES CO., LTD. could sell its low-priced products in emerging markets. This enabled the company to branch out from China and begin to build its presence internationally. With a current stronghold in emerging markets, the company is now focusing on growing overseas business in developed European and U.S. markets. In 2007, Huawei derived 72% of total revenue from the international segment, increasing 670 basis points from the previous year. In 2007, Huawei signed significant deals with operators in its target geographies. In December 2007 the company signed a deal with T-Mobile International to construct Packet Switched Core Networks in five European countries: Germany, the United Kingdom, Austria, the Netherlands and the Czech Republic. The T-Mobile deal follows earlier 2007 deals, which confirms that Tier 1 operators, particularly in Europe, are seriously considering Huawei for large-scale deals. In July 2007, Telecom Italia selected Huawei to build a High-Speed Packet Access (HSPA) network in southern Italy, and Huawei will supply its latest generation of Node B products to Telecom Italia. Huawei’s first big deal in Europe was secured in February 2006 with Vodafone, which opened the gate for more large deals within the geography. The company is hopeful that it can increase its business with Vodafone in 2008 – in January, Vodafone and Huawei announced an agreement to create an “Application Innovation Center” in Spain to develop innovative mobile solutions. Though North America still composes a small proportion of Huawei’s total revenue, the region presents opportunities for growth. Current U.S. customers include Alltel, Leap Wireless and Metro FOURTH CALENDAR QUARTER 2007 PCS. Despite the progress, however, the company has yet to land a major deal for network infrastructure. The Alltel and MetroPCS deals focused on data cards and handsets, respectively, Huawei has yet to announce a major deal with any of the top four U.S. carriers. With the United States on the verge of a recession, operators may be feeling pressured to reduce capital spending. TBR believes this presents an opportunity for Huawei to enter the U.S. market at a lower price and gain share and recognition in the region, potentially at the expense of established players such as Ericsson and Alcatel-Lucent. Though Huawei suffered a setback with the unsuccessful acquisition bid for a minority stake in U.S.-based 3Com, we believe the company still has its sights set on the region. TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 6 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.
  • 7. TBR TBR NETWORK BUSINESS QUARTERLY BECOME A TOP GLOBAL TELECOM EQUIPMENT PROVIDER With the results from 4Q07 providing a final boost to a high-growth year, Huawei could look at its “top global telecom equipment provider” strategic objective and say its mission has been accomplished. However, the company is still in the midst of an unsettled market in which competitors continue to face consolidating customer opportunities, and positions among market leaders are not yet stable. First there were the mega-mergers of Ericsson-Marconi, Alcatel-Lucent and Nokia-Siemens Networks, then the split of Motorola into handsets and other businesses and Nortel’s challenges in finding revenue growth. In addition, Cisco continues to increase its position in service provider markets from its core enterprise area of strength, and Huawei itself faces significant competition at home and internationally from other Chinese suppliers such as ZTE who practice a similar cost-targeting business model. In addition, as the next-generation buildout of broadband mobile and fixed networks transition from SM WCDMA/HSDPA and XDSL, respectively, suppliers are challenged to make and leverage savvy research and development investments in 4G and next-generation optical and Ethernet networks. At the same time, service delivery infrastructure migration from a collection of legacy technologies to IP/web services is challenging suppliers’ resources. This is especially true at the application layer of the network, where IT players are providing competing products and services. TBR believes Huawei has found a challenging time to come of age as a top equipment supplier; less challenging than past issues of declining capex spending in the early 2000s, but Huawei may find itself seeking partners and acquisition or merger opportunities in regard to companies with complementary skills. TBR believes areas where Huawei needs to grow or acquire resources include the North American marketplace (especially as the 3Com investment failed), the application/service HUAWEI TECHNOLOGIES CO., LTD. layer, and in consulting and professional services that are not related to Huawei product deployments. FOURTH CALENDAR QUARTER 2007 TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 7 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.
  • 8. TBR TBR NETWORK BUSINESS QUARTERLY Corporate SWOT Analysis Strengths • International expansion provides company with access to many customers (4Q07 report) • Low operating costs that support low-cost pricing strategy • Broad portfolio of products to support end-to-end solutions • Installed base of Tier 2/3 telecom operators in emerging markets • Ability to leverage power and influence of government of China SM Weaknesses • Ties to Chinese government could limit international investment opportunities (4Q07 report) • Lacks a strong global presence, including in the United States and Europe • Installed base of Tier 1 telecom operators limited (or lacks credibility with Tier 1 telecom operators) • Tarnished reputation from past business practices Opportunities HUAWEI TECHNOLOGIES CO., LTD. • Expand rapidly into high-growth geographies (4Q07 report) • Expand rapidly through acquisitions • Expand global presence and penetrate Tier 1 accounts through partnerships and alliances • Become a top leader in professional and managed services (2Q07 report) Threats • Looming U.S. recession could have a global effect and negatively impact product sales (4Q07 report) • Immature organization implodes due to stress of rapid expansion (or business transformation of the organization to support rapid expansion fails) • Partnerships and alliances are unsuccessful due to lack of experience in managing relationships • Tier 2/3 telecom operators shift buying on price to buying on value of end-to-end solutions and services SOURCE: TBR. STRENGTH: INTERNATIONAL EXPANSION PROVIDES COMPANY WITH ACCESS TO MANY CUSTOMERS FOURTH CALENDAR QUARTER 2007 Whereas once Huawei only had a presence in the Asian market and with operators in emerging geographies, the company now has broad visibility in developed markets as well. TBR believes Huawei will be able to leverage this market position to capture greater share as well as establish partnerships. Global market presence with local offices united by a common service delivery network is critical in remaining a top-tier supplier. With strong financial resources and an unyielding mission to remain a market leader, Huawei has the assets to leverage its new market capabilities. WEAKNESS: TIES TO THE CHINESE GOVERNMENT COULD LIMIT INTERNATIONAL INVESTMENT OPPORTUNITIES In September 2007, Huawei announced its intention to acquire a 16.5% minority interest in 3Com Corporation. 3Com had agreed to be acquired by affiliates of global private investment firm Bain TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 8 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.
  • 9. TBR TBR NETWORK BUSINESS QUARTERLY Capital Partners, LLC for $2.2 billion, or $5.30 per share, in cash. As part of that transaction, Huawei would purchase a minority stake in 3Com through its wholly-owned subsidiary Huawei Tech Investment Co., Ltd. Also part of the agreement, Huawei would have the right in the future to increase its stake by 5%, resulting in a potential 21.5% share in 3Com. The 3Com board of directors unanimously approved the merger. The deal was expected to close in 1Q08, subject to shareholder and regulatory approval, and would have provided Huawei with increased traction in North America, particularly in the market for enterprise and SMB communications equipment. Huawei and 3Com had worked together in the past through the joint venture Huawei-3Com (H3C). The companies collaborated to produce IP-based routers and switches and provided 3Com with a solid position in the Chinese market. Huawei originally held a majority stake of 51% in the venture, but 3Com eventually increased its stake to 51%. In 2007, 3Com acquired Huawei’s remaining stake in the joint venture for $840 million. SM The proposed Huawei investment in 3Com captured the attention of both Congress and regulatory agencies. In October 2007, eight U.S. lawmakers challenged the acquisition and called on the government to block the purchase. In an effort to ease concerns, 3Com released a statement saying that Huawei would not gain operational or decision-making power for 3Com through the deal. However, in February, after federal authorities expressed increasing concern over national security issues pertaining to the deal, 3Com withdrew its acquisition application from the CFIUS. The company committed to continuing negotiations in an effort to arrange the deal in a way that would be satisfactory to the Committee. However, TBR believes Huawei’s ties to the Chinese government could inhibit the company’s opportunities to invest internationally. HUAWEI TECHNOLOGIES CO., LTD. OPPORTUNITY: EXPAND RAPIDLY INTO HIGH-GROWTH GEOGRAPHIES In addition to the company’s expansion in developed countries, Huawei has an opportunity to rapidly expand into high-growth geographies, such as India. This rapid international expansion enables Huawei to increase its proximity to customers, increase local headcount and gain a better understanding of the local markets. An understanding of local markets should in turn enable Huawei to offer customized products for specific regions, which could prove especially important in large and fast-growing geographies. Huawei has increased its focus on the Indian market, which grew 222.5% year-to-year from $186 million in 2006 to $600 million in 2007. In 2008, the company expects revenue from the region to double, pushing past $1 billion. Huawei has achieved rapid growth in India due to the country’s quickly growing telecom market and its increased local presence. India’s wireless subscribers totaled 251 million at the end of February, with monthly net additions totaling approximately 8 million. At this rate, India will overtake the United States in terms of total wireless subscriber base, which is currently at 256 million according to CTIA, in April to become the country with the second-largest wireless network in the world, behind only China. Huawei is taking advantage of the accelerated subscriber growth in the country and hopes to replicate the success it has enjoyed in its domestic market. In India, the company currently employs 1,500 people in R&D and 700 people in sales, and plans to increase R&D headcount to 2,000 by the end of 2008. Huawei has two R&D centers in Bangalore, FOURTH CALENDAR QUARTER 2007 the second of which was constructed in September 2006. Huawei has invested $100 million in the R&D centers in Bangalore and plans to spend another $100 million on the integrated campus, which will be fully operational in 2010. The company’s R&D centers in Bangalore maintain a focus on software development, with specific projects including IP, New Generation Networks, optical transmission software and value-added software. The local presence is enabling the company to customize products specifically for the Indian market, including lower-cost CDMA equipment. Recent large-scale customer wins in India include a $200 million GSM expansion contract with Reliance and a $150 million managed services deal with Airtel. TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 9 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.
  • 10. TBR TBR NETWORK BUSINESS QUARTERLY THREAT: LOOMING U.S. RECESSION COULD HAVE A GLOBAL EFFECT AND NEGATIVELY IMPACT PRODUCT SALES The U.S. economic crisis has already diminished the value of publicly traded currency worldwide. The carryover effect on the service providers concerned about the value of their own investments will soon echo through the industry. TBR believes Huawei will be somewhat insulated from this crisis during 2008, and the company can take the year to consolidate its gains before launching expansion plans to capture U.S. business. Meanwhile, Huawei may be able to capture a further foothold in the United States with a low-cost, high-value proposition among hard-pressed second- and third-tier service providers. SM HUAWEI TECHNOLOGIES CO., LTD. FOURTH CALENDAR QUARTER 2007 TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 10 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.
  • 11. TBR TBR NETWORK BUSINESS QUARTERLY Financial Model Strategy On the heels of a successful 2007, Huawei has already set performance goals for 2008. The company’s 2008 order objective is $22 billion, representing a 37.5% year-to-year increase from 2007 orders worth $16 billion. TBR believes that $16 billion in orders represents $11.7 billion in revenue for Huawei, and the $22 billion order objective would represent $16 billion in revenue. The company’s primary growth strategy is international expansion; after experiencing success in emerging markets, Huawei is looking to enter the U.S. and European markets. TBR HUAWEI REVENUE AND PROFITABILITY SM $12 42.0% 40.0% $9 In $ Billions 38.0% $6 36.0% $3 34.0% $0 32.0% 2005 2006 2007 Est. HUAWEI TECHNOLOGIES CO., LTD. Revenue Gross Margin SOURCE: TB R A ND HUA WEI. TBR REVENUE GROWTH YEAR-TO-YEAR 75.0% 56.3% 60.0% 42.2% 37.6% 45.0% 30.0% 15.0% 0.0% 2005 2006 2007 Est. SOURCE: TB R A ND HUA WEI. FOURTH CALENDAR QUARTER 2007 TBR estimates Huawei grew revenue by 37.6% year-to-year in 2007, increasing 460 basis points from 2006. International expansion contributed to the high year-to-year growth. TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 11 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.
  • 12. TBR TBR NETWORK BUSINESS QUARTERLY TBR SG&A AS A PERCENTAGE OF REVENUE 25.0% 17.7% 18.3% 20.0% 16.9% 15.0% 10.0% 5.0% SM 0.0% 2005 2006 2007 Est. SOURCE: TB R A ND HUA WEI. TBR estimates that Huawei’s SG&A as a percent of revenue totaled 18.3% in 2007, up 60 basis points from 2006. We estimate SG&A expenses of $2.1 billion in 2007, up $639 million, or 42.5% year-to-year. As Huawei continues its international expansion, the company’s SG&A expenses will continue to increase. As Huawei continues to expand internationally, the company has invested in building out its local presence. The company has established 100 branch offices, which enable the company to increase HUAWEI TECHNOLOGIES CO., LTD. proximity to customers and hire local employees. With this broad expansion come increased costs, which put downward pressure on the company’s margins. TBR believes this international expansion is necessary if Huawei wants to win additional international deals, especially in developed countries. Hiring local talent is important to large deals that require extensive oversight and involvement. TBR R&D AS A PERCENTAGE OF REVENUE 12.0% 9.8% 10.0% 10.0% 9.0% 6.0% 3.0% 0.0% 2005 2006 2007 Est. FOURTH CALENDAR QUARTER 2007 SOURCE: TB R A ND HUA WEI. Traditionally, Huawei has invested 10% of its revenue and 40% of its workforce in R&D activities. TBR questions whether the company will be able to maintain this, due to the downward pressure on margins from international expansion. As Huawei increased total headcount to 70,000 people, the proportion of employees working on R&D increased as well. In and before 2006, the company committed 40% of headcount to R&D, which has increased within the past year to compose half of total headcount in 2007. The company’s R&D focus has enabled Huawei to transition from a low-cost provider to an end-to-end solutions provider. TBR believes the company’s focus on R&D will remain critical in the future, though the proportion of revenue invested in R&D may decline. TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 12 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.
  • 13. TBR TBR NETWORK BUSINESS QUARTERLY TBR HUAWEI'S MARGINS 40.5% 40.0% 36.2% 35.5% 30.0% 20.0% 14.2% 10.0% 7.3% 7.2% 0.0% SM 2005 2006 2007 Est. Gross Margin Operating Margin SOURCE: TB R A ND HUA WEI. TBR believes Huawei’s gross margin totaled 35.5%, down 70 basis points year-to-year. We also believe the operating margin declined by 10 basis points year-to-year, as expenses increased as a percentage of revenue. We estimate the company’s operating income totaled $842 million in 2007, up $221 million, or 35.7% year-to-year. HUAWEI TECHNOLOGIES CO., LTD. Note: TBR performs extensive revenue and profit modeling on the IT industry, covering professional services, computer, software, peripherals, networking and wireless handheld devices. Please contact Vice President of Sales James McIlroy (mcilroy@tbri.com) or NBQ Director John Byrne (john.byrne@tbri.com) at 603-929-1166 for further information. FOURTH CALENDAR QUARTER 2007 TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 13 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.
  • 14. TBR TBR NETWORK BUSINESS QUARTERLY Alliance & Acquisition Strategies In February, Huawei and Symantec commenced a joint venture, headquartered in Chengdu, China, that will produce security and storage appliances to enterprises. Huawei licenses technology and Symantec licenses storage and security software. The deal was originally announced in May 2007, but had to undergo a regulatory approval process. The new company, which will be called Huawei-Symantec Inc., sells x86 systems with Symantec’s antivirus and content scanning software and will also utilize a new line of network-attached storage (NAS) and a storage area network (SAN) developed by Huawei packaged with Symantec’s Storage Foundation software. In addition to technology, Huawei will bring its integrated supply chain, integrated product development management practices, IP licenses, R&D capabilities, manufacturing ability and engineering skill SM (including over 750 employees) to the venture. The deal allows Huawei to gain access to a strong software portfolio, and enables Symantec to enter the Chinese market and take advantage of Huawei’s established presence. Huawei maintains a majority 51% ownership in the venture, with Symantec owning the balance; Symantec also contributed $150 million to the venture. TBR Huawei’s Joint Venture Partnerships COMPANY SCOPE OF PARTNERSHIP Qualcomm Huawei and Qualcomm collaborated to test the first end-to-end VoIP call using CDMA2000 1x November 2007 EV-DO Rev. A access through the IP Multimedia Subsystem network. HUAWEI TECHNOLOGIES CO., LTD. Symantec In May 2007, Huawei and Symantec announced a joint venture to develop and distribute security and May 2007 storage appliances to telecom carriers. The venture, of which Huawei and Symantec own 51% and 49%, respectively, concentrates on constructing hardware to develop and maintain IP networks. Global Marine In May 2007, the companies entered into a Memorandum of Understanding with the intent to form a Systems Limited joint venture to provide submarine network solutions. Global Marine Systems is an independent subsea cable installation and maintenance company. Siemens (TD Tech) Huawei and Siemens established a $100 million joint venture in early 2004 to focus on TD-SCDMA technology for the Chinese market, and then potentially outside of China. Siemens and China’s Datang are the major developers of TD-SCDMA technology. HP HP and Huawei say they have a long-standing relationship of working together to meet the needs of operators worldwide. In March, HP and Huawei announced a more concrete relationship based on OSS, which includes OSS integration, joint solutions, go-to-market plans and global services. Microsoft Relationship was established in 2003 to integrate Microsoft technology into Huawei solutions. Huawei says there may be new areas in which the companies will work together in the future. SOURCE: TBR AND HUAWEI. TBR Huawei’s Supplier Partners and Joint Initiatives COMPANY SCOPE OF PARTNERSHIP COMPANY SCOPE OF PARTNERSHIP 3Com Mid- to low-end data products Microsoft Enterprise network solution development Agere Systems Network component supplier Motorola Base station development (Huawei OEM to Motorola) FOURTH CALENDAR QUARTER 2007 BEA Systems IMS network infrastructure Nortel Joint partnership on broadband access (discontinued) Brightstar Terminal products Philips Semiconductors, including 3G ASICs BroadSoft, Inc. IMS solutions QUALCOMM 3G chipsets for mobile phones, UMTS receiver technology Cosmobic Joint venture with NEC and Panasonic on RadiSys MRS Products 3G mobile phones Corporation CounterPath IMS/FMC services with CounterPath’s Radvision Unified visual communications over IP, Solutions eyeBeam softphone 3G and emerging next-generation networks D-Link Component products and exchanges Sun Java development for 3G platform Microsystems Foxconn Terminal equipment CPE Sylantro Application feature for IMS Core 3.0 TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 14 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.
  • 15. TBR TBR NETWORK BUSINESS QUARTERLY TBR Huawei’s Supplier Partners and Joint Initiatives COMPANY SCOPE OF PARTNERSHIP COMPANY SCOPE OF PARTNERSHIP Giant Online game applications Synaptics Capacitive sensing technology Interactive Infineon 3G chipsets for mobile phones TD Tech Siemens joint venture on TD-SCDMA Technologies Intel WiMAX development Texas Digital signal processing Instruments Irdeto IPTV content security The Orchard AIMI digital music solution Kasenna Video-on-demand core component VIVO VIVO GSM Evolution Project LightPoint Free Space Optical Network products Tundra Serial RapidIO Switch, Digital Signal SM Semiconductor Processors SOURCE: HUAWEI AND TBR. HUAWEI TECHNOLOGIES CO., LTD. FOURTH CALENDAR QUARTER 2007 TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 15 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.
  • 16. TBR TBR NETWORK BUSINESS QUARTERLY Go-to-Market & Product Strategies Huawei has recently tried to transform the notion that it is just a low-cost provider: The company asserts that on many of the bids it has won, it has not been the lowest bidder. Huawei has transitioned to a total solutions provider, pushing the quality of products over the price of the solution. The company has developed strong market positions by combining its cost-effective approach with compliance to standard technical requirement for in-demand service provider equipment. For example, Huawei has made significant inroads in the fiber to the home market by introducing standards-compliant GPON technology; in 2006, the company introduced a 1 Terabit GPON switch, the SmartAX OFA5920. The company also focused on long haul DWDM and next-generation SDH/SONET, achieving fast revenue growth. SM Huawei is also a provider of devices: In 2007 the company reported terminal sales of 40 million, including handsets, data cards, fixed wireless terminals and gateways, to total $2.5 billion. Huawei’s mobile broadband device sales total 8 million to date, with the majority of sales to Europe, the United States and Japan. The key to Huawei’s go-to-market strategy is to target its technical and cost-competitive assets at growth opportunities where service providers are seeking new ways to add network capacity at a relatively low capex investment. TBR believes the company will continue to be successful if it does not stray from this formula, which is the core of its differentiation. HUAWEI TECHNOLOGIES CO., LTD. TBR Huawei’s Recent Product Introductions KEY MARKET PRODUCT SERIES CONFIGURATION POSITIONING iManager T2000 Transport network management system Available in North America V200R004NA Manages multi-services, alarm correlation analysis, only, reduces customers’ March 2008 system security solution, system reliability solution operating costs OptiX BWS 1600S Reliable submarine cable system Marketed to overseas carriers V100R002 Can be configured as 100G/50G/25GHz channel as a large-capacity, March 2008 space, which adopts SuperDRZ, AFEC, long-distance submarine RAMAN/ROPA/HBA, TDC technologies cable E510 datacard Mobile TV capable 3.5G datacard Targeted to both professionals March 2008 2M HSUPA stick and entertainment users iManager T2000 Transport network Element-level Management Medium- and small-scale V200R006C01 System (EMS), Sub-Network Management System transport network February 2008 (SNMS) management End-to-end management, alarm correlation analysis, automatic fault diagnosis, system security solution, system reliability solution, intelligent and legacy services IP Transport Transport solution offering improved broadband in Marketed to carriers Infrastructure for Mobile 2G/3G mobile networks transitioning from 2G to 3G, FOURTH CALENDAR QUARTER 2007 Evolution (IPTime) GPS-grade packet clock synchronization HSPA or LTE February 2008 OAM and protection capabilities Pseudo-Wire Emulation Edge to Edge capability Supports TDM, Ethernet, microwave, xDSL, xPON Green Sites Solution Decrease base station consumption by approximately Environmentally friendly, February 2008 60% reduces power consumption , DPD and A-Doherty power amplifier technologies decreases noise and pollution OptiX BWS 1600A Standard TL1 command interfaces, NEBS-compliant Available in North America V100R003 hardware architecture, UL and FCC-compliant only January 2008 Solutions for long-haul backbone transmission networks, metropolitan backbone and access networks TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 16 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.
  • 17. TBR TBR NETWORK BUSINESS QUARTERLY TBR Huawei’s Recent Product Introductions KEY MARKET PRODUCT SERIES CONFIGURATION POSITIONING Vodafone Mobile High Speed Uplink Packet Access Designed for mobile users Broadband USB Modem Enables uplink speeds up to 2 Mbps and download wanting style and portability Stick (E172) rates up to 7.2 Mbps January 2008 Compatible with newest Windows and Mac operating systems iManager N2000 BMS Support management for MA5600T V8R5 and For access network devices V200R011C01 MA5680T V8R5 November 2007 O&M Efficient Subsystems 1-1.75 million broadband user capacity SM Quidway AR 19/29/49 VPR V5 software platform Puts adaptive services on one Series Router V300R001 IPv6 and MPLS TE Platform platform for Medium to Large November 2007 Businesses Hardware Encryption Algorithm High Density Voice CF and USB Interface WiMAX Commercial Uses HSPA/LTE/UMB co-platform infrastructure Provide operator base stations Solution Integrates 4G technologies, Hybrid Automatic with 30% cost savings while October 2007 Repeat-reQuest, Multiple Input Multiple Output doubling system capability Can utilize WiMAX with GSM, CDMA, IMS, NGN, DSL Huawei DataCom iManager N2000 DMS V300R003 Provide NM solutions that HUAWEI TECHNOLOGIES CO., LTD. Network Management iManager NSM V200R005 comply with the eTOM/TOM System model October 2007 EoMPLS+ Metro Service Platform CX Series Integrates VoIP, P2P, VOD, October 2007 Multi Service Control Gateway ME 60 series IPTV, NGN and 3G into one platform, which helps operators evolve to FMC SOURCE: HUAWEI. FOURTH CALENDAR QUARTER 2007 TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 17 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.
  • 18. TBR TBR NETWORK BUSINESS QUARTERLY Customer & Vertical Market Strategies Huawei has demonstrated a desire to address the enterprise market through the acquisition of a stake in 3Com and a proposed joint venture with Symantec. Though the 3Com deal did not work out as originally planned, it still exhibits Huawei’s strategy to pursue the enterprise market. 3Com, including H3C, its former joint Venture with Huawei, provides enterprise networking solutions to corporations. The Huawei-Symantec joint venture focusing on security and storage is a new area for Huawei, which previously had limited experience in the high-end storage market. The venture will package Symantec’s software with Huawei’s hardware to offer a complete product to enterprises. TBR notes that partnerships and joint ventures will enable Huawei to gain access to companies that have successfully penetrated the enterprise market. SM In its primary business serving network operators, the company stepped up its focus on Tier 1 markets. In December 2007, Huawei closed a deal with T-Mobile International to supply Packet Switched Core Networks (PS-CN) in five countries in Europe, including Germany, the United Kingdom, Austria, the Netherlands and the Czech Republic. Huawei will install next-generation PS-CN equipment in place of T-Mobile’s existing networks, which were supplied by Nortel. The PS-CN infrastructure elements include Serving GPRS Support Node (SGSN) and Gateway GPRS Support Node (GGSN), the two primary data network pieces in GSM and WCDMA/3G networks. In July 2006, Huawei provided IP Multimedia Subsystem (IMS) infrastructure and applications to Magyar Telekom, a subsidiary of Deutsche Telekom. TBR believes this next step of collaboration between the companies is an important step for Huawei in its quest to penetrate and maintain Tier 1 HUAWEI TECHNOLOGIES CO., LTD. accounts worldwide. It also sends a message to operators that Huawei is a legitimate choice when it comes to decisions concerning infrastructure selection and implementation. Additional past big wins for the company in Europe include Telecom Italia, Orange, Vodafone Spain and Telefonica Spain. However, the company continues to garner the bulk of its business from emerging markets. As shown below, the company has recently scored major deals with Chinese and Indian operators, including China Netcom, China Unicom, China Mobile, Tata Indicom and BNSL. TBR Huawei’s Recent Customer Deals CLIENT SCOPE OF DEAL China Netcom Huawei was selected by China Netcom to provide 40% of the company’s optical access China solutions. The deal positions Huawei as China Netcom’s largest supplier of optical solutions. March 2008 China Unicom Huawei will provide China Unicom with a CDMA network involving more than 1,600 China frequencies. February 2008 Tata Indicom The commercial network of Tata Indicom is utilizing Huawei’s All-IP CDMA solution to bring India telecom across India. February 2008 FOURTH CALENDAR QUARTER 2007 China Railway Ministry Huawei will build the communication system for the high speed train line from China Guangdong-Shenzhen-Hong Kong. Huawei is meeting the Railways requirements by using a weak field GSM-R solution. February 2008 China Mobile Huawei upgraded China Mobile’s long-distance network to allow an All-IP technology. China February 2008 PT Telekomunikasi Huawei completed its project to deploy a CDMA2000 network for Telekomunikasi. Indonesia February 2008 Mobily Mobility chose Huawei to install a Packet Switched Core Network for HSDPA in Saudi Arabia. Saudi Arabia January 2008 TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 18 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.
  • 19. TBR TBR NETWORK BUSINESS QUARTERLY TBR Huawei’s Recent Customer Deals CLIENT SCOPE OF DEAL MTNL Huawei assisted MTNL install its Multi Protocol Label Switching network, which will provide India India with Internet, VoIP and IPTV. January 2008 TransTelecom Huawei will construct a commercial WiMAX network for TransTelecom in Bulgaria. The Bulgaria WiMAX network will run on a 3.5GHz frequency band, including terminals, and will include an upgrade of central exchange equipment. January 2008 MetroPCS Huawei will provide MetroPCS with the Huawei M318 handset, marking the first Huawei US mobile phone in the North American market. The handset offers text messaging, speaker phone, 1.5-inch color display, WAP 2.0, BREW and 72-chord ringtones. December 2007 SM VympelCom Huawei will supply VympelCom with equipment to construct a 3G network. Equipment will Russia include radio elements, network core, switches and systems of data packet transfer. December 2007 Babilon-T Huawei will deploy a commercial WiMAX network in Tajikistan for Babilon-T, representing Tajikistan the first commercial WiMAX deployment in Central Asia. Included in the WiMAX agreement December 2007 is an end-to-end Mobile WiMAX network, base stations, wireless access services node gateway, network management equipment and terminals. SingTel Huawei constructed an All IP Broadband Network for SingTel. The solution includes Singapore Huawei’s core router, NE80E, NE5000E and large-capacity IP DSLAM SmartAX MA5600. December 2007 ITC Huawei will provide International Telecommunication Company (ITC) with an All IP CDMA HUAWEI TECHNOLOGIES CO., LTD. Ukraine network in Ukraine. The voice core network will include IP softswitch, high-speed core data network and an EV-DO Rev. A radio access network. December 2007 T-Mobile International Huawei will supply T-Mobile International with Packet Switched Core Networks (PS-CN) in Europe Germany, the United Kingdom, Austria, the Netherlands and the Czech Republic. Huawei will swap current networks with PS-CN equipment. December 2007 Mobily Huawei will provide an IP bearer network for Mobily in Saudi Arabia. The solution will Saudi Arabia include Huawei’s core routers NE5000E, NE40E and network management systems iManager November 2007 N2000, DMS and NSM. China Mobile Huawei completed construction of the world’s first Internet Protocol-based base station China subsystem (IP BSS) commercial network in China for China Mobile. October 2007 Warid Group Huawei will construct an IMS system for the Warid Group in Uganda. In addition to the IMS Uganda system, Huawei will supply GSM network parts, wireless base stations, a VAS platform, long-distance/international gateway offices and an IP bearer network. September 2007 Bharti Airtel Lanka Huawei signed a three-year, $150 million managed networks deal with Bharti Airtel Lanka, a Private Limited subsidiary of Bharti Airtel Limited. Included in the agreement is construction and management Sri Lanka of the core network, Node Bs and BTSs and end-to-end 2G/3G network solutions. September 2007 PTK Centertel Huawei will construct a UMTS/HSPAnetwork for PTK Centertel in Poland. Huawei will Poland install its new generation Node B solution which supports HSDPA, HSUPA and IP RAN. FOURTH CALENDAR QUARTER 2007 September 2007 EMOBILE Huawei will expand EMOBILE’s network with HSPA technologies, including 2,300 distributed Japan Node Bs and an iDBS system. September 2007 China Mobile Huawei will construct a GSM base station on Mount Everest for China Mobile. The base China station will cover Everest’s base camp and the main route to the summit. September 2007 Saudi Telecom Huawei will construct the first WiMAX 802.16e network in the Middle East for Saudi Saudi Arabia Telecom. Included in the deal is an end-to-end WiMAX 802.16e network, base station, access service network gateway, network management system, authorization, authentication and August 2007 accounting system. TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 19 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.
  • 20. TBR TBR NETWORK BUSINESS QUARTERLY TBR Huawei’s Recent Customer Deals CLIENT SCOPE OF DEAL QSC AG Huawei completed a multi-service control gateway ME60 installation in the All IP network of Germany QSC AG in Germany. August 2007 StarHub Huawei completed construction of an HSUPA commercial network in Singapore for StarHub. Singapore The network includes 1,000 next-generation distributed Node B base stations. August 2007 Alltel Huawei will provide PC data cards products for Alltel Wireless in the United States. The United States Huawei EC360 data card will be available for customer purchase at Alltel retail stores. August 2007 SM China Unicom Huawei announced it had been selected by China Unicom, a leading service provider in China, China to deploy a next-generation IP network. The contract makes Huawei China Unicom’s largest IP Network Transformation Partner, supplying all of China Unicom’s Core Router purchases and July 2007 67% of the service provider’s Edge Router purchases. Reliance Reliance Communications Ltd. announced awarding a network expansion contract to Huawei Communications Ltd. worth more than $200 million. The contract covers the deployment of an all-IP Next Generation India Network. Under the agreement Huawei will provide services for CDMA and GSM base July 2007 stations, including BSC (Base Station Controller) and switches. Leap Wireless Huawei announced it signed CDMA2000 infrastructure agreements with Cricket United States Communications, Inc., a wholly owned subsidiary of Leap Wireless International, Inc. and Deanali Spectrum Operations, LLC for deployment of Huawei’s latest third-generation CDMA July 2007 technology. HUAWEI TECHNOLOGIES CO., LTD. Telecom Italia Huawei was selected by Telecom Italia to expand and upgrade its HSDPA (high-Speed Italy Downlink Packet Access) networks covering Southern Italy, including the city of Palermo. The expansion is intended to increase Telecom Italia’s network capacity to allow for new services July 2007 through Europe. Kalimat Telecom Kalimat Telecom awarded Huawei a $275 million infrastructure contract to deploy a fixed Iraq wireless network in Iraq. July 2007 Uganda Telecom Huawei was chosen to augment Uganda Telecom’s GSM network to 70% national coverage. In Uganda the $50 million deal, Huawei will supply and install 200 Base Transmission Stations. July 2007 SOURCE: TBR AND HUAWEI. FOURTH CALENDAR QUARTER 2007 TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 20 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.
  • 21. TBR TBR NETWORK BUSINESS QUARTERLY Geographic Analysis Huawei is looking to fuel 2008 growth through international expansion. In 2007, Huawei derived 72% of total revenue from the international segment, up 670 basis points from the previous year. With a current stronghold in emerging markets, the company is focusing on growing overseas business in developed European and U.S. markets. To date, Huawei has deployed products and services in over 100 countries. The company touts its international expansion, including 12 R&D centers, 28 training centers and 100 branch offices internationally. This rapid international expansion enables Huawei to increase its proximity to customers, gain a better understanding of the local markets and increase local headcount. HUAWEI GEOGRAPHIC REVENUE SM TBR FISCAL YEAR 2004 2005 2006 2007 China 73.0% 60.0% 34.7% 28.0% International 27.0% 40.0% 65.3% 72.0% SOURCE: TBR ESTIMATES AND HUAWEI. Huawei continues to utilize its low-cost manufacturing process to offer economical solutions to emerging countries. The vendor has established a strong foothold in emerging markets, which have helped drive the company’s rapid growth. Huawei experienced growth of 35% year-to-year in 2007 in the Middle East & North Africa (MENA) region to bring the geography to 17% of total revenue. The company is targeting 30% year-to-year growth in 2008, expected to be fueled by 3G HUAWEI TECHNOLOGIES CO., LTD. deployments. As China frantically prepares for the 2008 Beijing Olympic Games, Huawei has signed multiple deals to prepare for the onslaught of data-hungry athletes, officials, press and international spectators. In March, China Netcom selected Huawei to provide 40% of the company’s optical access solutions, making Huawei China Netcom’s largest supplier of optical solutions. China Netcom will provide fixed communication services for the 2008 Beijing Olympics, requiring the company to enhance its broadband services through the deployment of optical access solutions. Huawei will provide the SmartAX5600T series optical access equipment, enabling China Netcom to provide multi-play services to customers. Huawei won the largest portion of the contract after a bidding process involving 12 vendors. Also in anticipation of the 2008 Beijing Games, Huawei was selected to deploy and upgrade a CDMA network for China Unicom. The network will cover Tianjin City, one of the cities hosting Olympic events, in North China. Huawei will supply an All-IP solution to the carrier, including core network and radio access equipment. The upgraded network will enable the operator to meet high network demand during the Games. TBR believes China will continue to be a significant market for Huawei. As the vendor branches out internationally, China still remains the largest single-country proportion of total revenue. TBR anticipates demand for network deployments and upgrades will continue after the 2008 Beijing FOURTH CALENDAR QUARTER 2007 Olympics as the country expands the TD-SCDMA technology deployment and continues to add subscribers at a rapid pace. TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 21 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.
  • 22. TBR TBR NETWORK BUSINESS QUARTERLY Resource Management Strategy In 2007, Huawei increased its total headcount to 70,000, up from 61,000 in 2006. TBR believes the majority of the hires occurred in the R&D field. In 2007, Huawei reported half of the total headcount was committed to R&D activities, translating to approximately 35,000 individuals, up from 40% of the 2006 total headcount, or 24,400 individuals. This jump in R&D staff supports the company’s commitment to R&D and innovation and also speaks to the company’s international expansion. The company has benefited from low-cost labor in both China and India, where the company is growing R&D operations. TBR believes Huawei will continue to hire engineers globally and headcount will increase once again in 2008. Huawei drives innovation by earmarking approximately 10% of total revenue to R&D activities. Of SM the company’s R&D spend, 10% of that is spent on “pre-research,” enabling the company to proactively pursue emerging technologies. At the end of 2007, the company had filed 26,880 patent applications, of which 4,256 had been approved. In January, Huawei and Vodafone announced they would jointly construct an Application Innovation Centre in Madrid, Spain that will develop innovative mobile products and services. The companies will work together and leverage synergies to develop products and solutions for Vodafone. TBR Huawei’s Facilities HUAWEI TECHNOLOGIES CO., LTD. LOCATION FUNCTION Shenzhen, China Chinese Headquarters, East Pacific Headquarters Basingstoke, United Kingdom European Headquarters Moscow, Russia CIS Headquarters Plano, Texas, United States North American Headquarters Cairo, Egypt Middle East and North Africa Headquarters Sao Paulo, Brazil Latin American Headquarters Johannesburg, South Africa South African Headquarters Kuala Lumpur, Malaysia Asia Pacific Headquarters Stockholm, Sweden R&D Facility Bangalore, India R&D Facility Dallas, Texas, United States R&D Facility Silicon Valley, Calif., United States R&D Facility Moscow, Russia R&D Facility Shenzhen, China R&D Facility Shanghai, China R&D Facility Beijing, China R&D Facility FOURTH CALENDAR QUARTER 2007 Nanjing, China R&D Facility Hangzhou, China R&D Facility Chengdu, China R&D Facility SOURCE: TBR AND HUAWEI. TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 22 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.
  • 23. TBR TBR NETWORK BUSINESS QUARTERLY Future Outlook 12-Month and Long-term Outlook • TBR believes Huawei will continue to expand internationally in emerging markets in India and APAC countries, as well as in more developed countries in Europe and North America. We anticipate many of Huawei’s deals in developed countries will continue to be smaller in nature as the company gains a foothold in the markets. Once Huawei has established a larger presence in Europe and completes some deals with Tier 2 operators in the United States, the company will begin to win larger deals with Tier 1 operators. • TBR anticipates Huawei’s revenue will continue to rise at an impressive rate. The company’s 37.5% year-to-year revenue growth target is attainable through international SM expansion and high-quality product sales. Though the company is still generally considered a low-cost provider, its strengthened reputation is enabling it to command higher prices for its products and services. Securing larger deals with established operators will also enable Huawei to strengthen its reputation and win additional higher-level customer deals, resulting in increased revenue. • Huawei will continue to invest approximately 10% of revenue into R&D, which may put pressure on margins in 2008. TBR believes R&D focus is critical for the company to maintain its technology edge, especially as it secures larger deals. • The unsuccessful bid for a minority stake in 3Com demonstrates the company still faces HUAWEI TECHNOLOGIES CO., LTD. challenges in international expansion. TBR believes the secretive nature of the company could inhibit collaboration and acquisitions in the future, but will not likely have a major effect on growth prospects in 2008. FOURTH CALENDAR QUARTER 2007 TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 23 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.
  • 24. TBR TBR NETWORK BUSINESS QUARTERLY Income Statement HUAWEI TECHNOLOGIES CORPORATION Consolidated Income Statements** (in $ Thousands Except per Share Data) TBR CALENDAR YEAR 2005 2006 2007 Est. FISCAL YEAR 2005 2006 2007 Est. Revenues $ 5,981,542 $ 8,503,897 $ 11,700,000 Cost of Sales 3,559,366 5,424,011 7,546,500 Gross Profit 2,422,176 3,079,886 4,153,500 R&D 588,000 850,390 1,170,000 SM SG&A 1,013,656 1,502,472 2,141,100 Total Operating Expenses 1,601,656 2,352,862 3,311,100 Other Operating Income/Loss 30,091 106,029 - Operating Income 850,611 620,995 842,400 Net financing costs 38,369 38,918 39,467 Share of losses of associates 12,552 15,025 17,498 Income before income taxes 799,690 567,052 785,435 Income taxes expense 115,788 54,664 113,888 Minority Interest 3,079 200 200 Net Income 680,823 512,188 671,347 HUAWEI TECHNOLOGIES CO., LTD. AS A PERCENTAGE OF REVENUE Revenues 100.0% 100.0% 100.0% Cost of Revenues 59.5% 63.8% 64.5% Gross Profit 40.5% 36.2% 35.5% R&D 9.8% 10.0% 10.0% SG&A 16.9% 17.7% 18.3% Operating Income 14.2% 7.3% 7.2% Net Income 11.4% 6.0% 5.7% YEAR-TO-YEAR CHANGE Revenues 56.3% 42.2% 37.6% Cost of Revenues 85.5% 52.4% 39.1% Gross Profit 26.9% 27.2% 34.9% R&D 20.7% 44.6% 37.6% SG&A 36.7% 48.2% 42.5% Operating Income 22.1% -27.0% 35.7% Net Income 9.1% -24.8% 31.1% SOURCE: TBR AND HUAWEI. ** 2007 results estimated FOURTH CALENDAR QUARTER 2007 TECHNOLOGY BUSINESS RESEARCH, INC. www.tbri.com P: (603) 929-1166 pg. 24 This report is based on information made available to the public by the vendor and other public sources. No representation is made that this information is accurate or complete. Technology Business Research will not be held liable or responsible for any decisions that are made based on this information. This report is not a recommendation to purchase securities. This report is copyright protected and supplied for the sole use of the recipient. Contact Technology Business Research, Inc. for permission to reproduce.

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