Slipping AsiaInfo Dials Up Revenue Contraction, Losses

Key Takeaways:

• AsiaInfo said it expects to report its revenue fell between 7% and 13% in the first half of 2024, as it lost between 70 million yuan and 120 million yuan for the period
• The company is falling victim to China’s slowing economy, combined with a wind-down in 5G spending by the country’s three main wireless carriers

By Doug Young

We’ve written plenty about how growing consumer caution is taking a toll on China’s retailers, sending many into revenue contraction and the loss column. Now, we can say the same looks true for telecoms services, based on a profit warning last Friday from AsiaInfo Technologies Ltd. ASNFF, one of China’s oldest private providers of telecommunications software.

The warning extends a recent deterioration of the company’s business into the first half of this year, as it slipped into the red for the first time since it relisted in Hong Kong in 2018. AsiaInfo was a pioneer in China’s telecoms sector when it made a U.S. IPO in 2000, and was generally profitable through its 14 years as a New York-listed company before it privatized in 2014.

Thus, the fall into the red in the first half of 2024 represents a dubious milestone for this telecoms veteran, which for years profited on business from the rapid rise of China’s three main telcos, China Mobile, China Unicom and China Telecom. The negative milestone was hardly unexpected, since AsiaInfo’s business began deteriorating last year as its three main customers began to rein in their spending.

According to the profit warning issued after markets closed, AsiaInfo expects to report a net loss of between 70 million yuan ($10 million) and 120 million yuan for the first six months of the year, reversing a 212 million yuan profit in the year-ago period. It said its revenue contracted around 10% year-on-year during the period, falling to between 2.85 billion yuan and 3.05 billion yuan from 3.28 billion yuan a year earlier.

AsiaInfo blamed uncertainty surrounding business from the three big telcos, noting that all are doing more software development in-house to try and save money as China’s economy slows after three decades of breakneck growth. It added its customers are also delaying their orders, adding to AsiaInfo’s own revenue pressures.

While the company’s swing into the loss column is new, the revenue contraction dates back to the second half of last year. AsiaInfo posted 5.6% revenue growth in the first half of 2023, with revenue reaching 3.28 billion yuan. But it slipped into contraction in the second half, as the figure fell by 0.4% to 4.61 billion yuan, according to calculations using company data.

The company managed to remain profitable throughout last year, even as its revenue began to contract. But even that metric began to slide from 12% growth in the first half of the year to a 50% contraction in the second half. Thus, the latest slide into the red and acceleration of its revenue contraction simply continues earlier trends.

AsiaInfo’s shares tumbled 20% when trade began on Monday, the first trading day after the announcement. The stock is down about 50% this year and has lost more than half of its value since its 2018 IPO. At current levels, it trades at a price-to-earnings (P/E) ratio of 8, which is the same as Hong Kong-traded shares of domestic peer ZTE (0763.HK; 000063.SZ), but trails the 16 for global networking equipment and software giant Cisco CSCO.

Ailing Telecoms Software Market

While AsiaInfo’s situation hardly looks promising, we should point out the global market for telecoms software looks even worse. Most similar mid-sized telecoms software makers are currently losing money, meaning AsiaInfo was one of the last remaining holdouts to join its peers with its recent fall into the red.

Globally speaking, the decline of traditional telecoms hardware and software makers has been happening for years as the big telcos that were their main customers stagnate with the rise of a new generation of smaller enterprise-level networks. China has resisted that trend somewhat as its three big state-owned telcos continued to spend heavily on government-directed investments in new state-of-the-art 5G networks.

In fact, China Mobile, Unicom and China Telecom all reported their revenue continued to grow in this year’s first quarter, though revenue gains for all three were up by 5% or less. All reported small year-on-year increases in spending on their networks for the period, though it appears they were cutting their purchasing from smaller, more general companies like AsiaInfo and focusing on newer, more specialized products.

AsiaInfo is trying to boost itself by focusing on such newer businesses, which it breaks into three categories: digital intelligence-driven operation, vertical industries digitization, and operation support systems. Revenue from those three areas grew 12.7% last year, well ahead of its overall 2% revenue growth, accounting for about 37% of its revenue for the year. By comparison, revenue from the company’s older, core business support systems (BSS) software began contracting last year, falling by 0.9% to 4.88 billion yuan for the year.

In its annual report last year, AsiaInfo called the current external economic situation “severe and complex,” pointing out that many communications companies were trying to lower their spending and develop more of their products in-house.

Such signals probably indicate the big three telcos are slowing their spending after several years of aggressively building up their 5G networks on government orders. Beijing identified that buildup as a high priority when 5G networks began to launch several years ago, resulting in lavish spending by the telcos even as many observers said such ultra-high-speed services weren’t necessary for average consumers.

The carriers now all operate national 5G networks, even though many may be underutilized. At the same time, Chinese consumers are reining in their spending as uncertainties mount. The latest government data shows national retail sales rose just 2% year-on-year in June, marking the slowest gain since December 2022. While discretionary categories like cosmetics and cars are taking the biggest hit, many consumers may also be downgrading their mobile plans to save a few dollars each month as well.

The bottom line is that AsiaInfo is likely to post more revenue contraction and losses for the rest of the year, and quite possibly into next year as well. Its better-performing newer businesses could offset some of the pain, but will have limited impact due to their relatively small proportion of the company’s overall revenue.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.