2012 Annual Report - ZTE

ZTE CORPORATIONManagement Discussion and AnalysisUnit: RMB in millionsProduct segmentGross profit2012 2011Gross profitmarginGross profitGross profitmarginCarriers’ networks 11,037.9 26.5% 16,720.0 35.9%Terminals 4,289.7 16.6% 4,047.4 15.0%Telecommunication software systems, servicesand other products 3,346.3 19.9% 3,400.7 26.6%Total 18,673.9 22.2% 24,168.1 28.0%Cost of sales of the Group for 2012 increased 5.6% as compared to last year to RMB65,545.5 million. The Group’soverall gross profit margin of 22.2% was 5.8 percentage points lower as compared to last year, reflecting mainlylower gross profit margin for carriers’ networks and telecommunications software systems, services and otherproducts.Cost of sales of the Group’s carriers’ networks for 2012 amounted to RMB30,564.8 million, a 2.6% increasecompared to last year. The relevant gross profit margin was 26.5% versus 35.9% for last year. The decrease in grossprofit margin of carriers’ networks mainly reflected the decline of gross profit margin for optical communicationssystems, wireline switch and access systems and CDMA systems equipment.Cost of sales of the Group’s terminals for 2012 amounted to RMB21,549.1 million, a decline of 5.8% comparedto last year. The relevant gross profit margin was 16.6% versus 15.0% for last year. The increase in gross profitmargin for terminals reflected mainly the increase in revenue from smart terminals that commanded a higher grossprofit margin as a percentage of total revenue.Cost of sales of the Group’s telecommunication software systems, services and other products for 2012 amountedto RMB13,431.6 million, increasing by 42.9% compared to last year. The relevant gross profit margin was 19.9%,compared to 26.6% for last year. The decline in gross profit margin was mainly attributable to lower gross profitmargin reported for service products as a result of increased costs for human resources.OTHER INCOME AND GAINSOther income and gains of the Group for 2012 amounted to RMB4,508.7 million, representing a 23.0% growthcompared to RMB3,664.4 million for 2011. The increase reflected mainly to the increase of rebates of softwareproducts VAT.RESEARCH AND DEVELOPMENT COSTSThe Group’s research and development costs for 2012 increased by 4.0% to RMB8,829.2 million from RMB8,492.6million for 2011, and slightly from 9.8% for 2011 to 10.5% for 2012 as a percentage of operating revenue, reflectingmainly increased investments by the Group in the research and development of LTE wireless systems, serviceproducts and core networks, etc.SELLING AND DISTRIBUTION COSTSThe Group’s selling and distribution costs for 2012 increased by 2.1% to RMB11,340.9 million from RMB11,112.2million for 2011, and from 12.9% for 2011 to 13.5% for 2012 as a percentage of operating revenue, as the Groupincreased its investments in overseas market.54