ZTE Fined $900 Million for Illegal Sales to Iran

(Beijing) — Telecom giant ZTE Corp. said it has settled a years-long Washington probe against it for illegally selling U.S.-made equipment to Iran, agreeing to pay up to $1.2 billion in fines.

At the same time, ZTE released preliminary financial results that showed it expects to incur a massive fourth-quarter loss but will return to moderately strong profit growth in the current quarter as the company puts the probe behind it.

International investors welcomed the news, bidding up ZTE’s Hong Kong-listed shares by 6% in early trading on Wednesday after the announcements came out. But domestic investors, who were less bearish on ZTE during the probe, bid down the company’s Shenzhen-listed shares by about 2% before the stock was suspended midway through the morning session.

Washington had been investigating ZTE for the last four years over allegations that it illegally sold U.S.-made equipment to Iran in violation of U.S. sanctions that at the time were aimed at punishing the country over its nuclear development program. The two sides have been negotiating a settlement for the last year, as ZTE sought to avoid potentially crippling penalties that would have cut it off from its U.S. suppliers.

“If ZTE hadn’t pursued this kind of low-profile settlement, the penalty might have been even worse,” said Thomas Zhou, an analyst at market research firm IDC. “If it had refused to pay the fine, its U.S. suppliers would have been forbidden from exporting to ZTE, which could have forced it to halt most of its own production. It probably could have found alternate suppliers, but the cost would have been very high, reducing its competitiveness.”

Under its settlement, ZTE said it agreed to plead guilty and pay $892 million in fines, according to an announcement released late on Tuesday. It said it could also face another $300 million in fines, but added that part of the penalty was suspended for seven years pending its continued cooperation in the matter. It added that the settlement would have a “material impact” on its 2016 results.

Shortly after announcing the settlement, ZTE released preliminary results that showed it expected to post a net loss of about 5.2 billion yuan ($754 million) in last year’s fourth quarter, based on calculations using its full-year forecast and previous results from the first three quarters. It added its fourth-quarter revenue would total 29.7 billion yuan, down about 6% from a year earlier.

At the same time, the company also released a forecast for the current quarter, saying it expected its net profit to rise by up to 32% to between 1.15 billion yuan and 1.25 billion yuan, versus a year-ago profit of 950 million yuan. It said revenue for the period would rise by 10% to 20%.

“Such growth was mainly attributable to the year-on-year increase in revenue from carriers’ networks and revenue from consumer business for the reporting period, which resulted in growth in both operating revenue and gross profit,” the company said in the statement.

ZTE makes both networking equipment used by enterprises and telecom carriers, and also consumer products like smartphones. It has struggled in recent years due to stiff competition in the global smartphone market, and low margins for its networking equipment sales that are mostly focused on developing markets.

Contact reporter Yang Ge (geyang@caixin.com)