On March 28, 2024, ZTE held its 2023 annual results briefing. Xu Ziyang, Executive Director and President, Li Ying, Executive Vice President and Chief Financial Officer, Xie Junshi, Executive Vice President and Chief Operating Officer, and Ding Jianzhong, Secretary of the Board of Directors and Company Secretary, attended the meeting.
At the performance briefing, ZTE exchanged views with investors on issues of market concern such as the company's strategic planning, R&D key investment, product technology innovation and innovative business progress.
1. The fully decoupled full-stack intelligent computing solution empowers the AI industry to improve quality and efficiency
In the process of promoting the strategy of becoming a cyber power and achieving new quality productivity, the relevant departments of the mainland are committed to building a high-speed computing power network and building an integrated advanced digital infrastructure. This initiative is expected to promote the restructuring of production factors, accelerate productivity upgrades, improve resource utilization efficiency, and provide a flexible and efficient digital platform for innovation in various industries.
At present, the development of intelligent computing is in its infancy, and the new generation of computing infrastructure such as AI large models has shown great potential, indicating a long-term technological revolution. This revolution will change the existing technical route and development model, lower the threshold for the industry to obtain new capabilities, reduce the difficulty of learning unfamiliar technologies, and significantly reduce costs, promote the efficient sharing of social resources, and become a new driving force for innovation.
In the past year, global technology companies have embraced this wave of technology, from international giants to domestic enterprises, and the competition is fierce. However, with the current pace of technology iteration and peak market hype, it is necessary to avoid over-expecting or underestimating its long-term impact. With the passage of time, technology companies and capital markets have become more rational in their perception and expectations of AI, and more attention has been paid to how to effectively use AI technology to solve challenges and improve efficiency and competitiveness.
In the current technological change, in addition to technical challenges, reducing the unit cost of computing power and building an active cloud-native AI ecosystem are the keys to the healthy development of AI. These two key implementations focus on the "network" of computing power, realize the sharing of computing hardware resources through high-speed network connection, and reduce the cost of unit computing power, and realize the generalization of computing power expression through the unified service of the network, so that the expression of computing power can be standardized as much as possible, and reduce the cost of migration and border translation. Establish a virtual unified intelligent computing center through ultra-high-speed wide area network. The larger the scale, the lower the unit cost, the more unified the invocation mode, and the higher the efficiency.
Bits and atoms coexist, and the digital and physical worlds are interdependent. The foundation of large-scale AI is "connection + computing power" digital infrastructure, which pursues high efficiency and green, requires the collaborative optimization of software and hardware, computing networks, and applications and infrastructure, and relies on productization and industrialization capabilities. With 39 years of deep cultivation in the ICT field, ZTE actively leverages its advantages in full-stack and all-domain technology accumulation to help the healthy development of intelligent computing infrastructure and industries. The company not only increases R&D investment, but also expands market and ecological cooperation to help customers quickly build and apply large models and seize the opportunities of the era of intelligent computing.
In terms of hardware infrastructure, the company provides end-to-end computing infrastructure solutions, covering all computing power fields and high-speed WAN interconnection fields of general computing and intelligent computing. In addition to the familiar general computing servers and data centers, 400G/800G backbone transmission, for intelligent computing, ZTE has launched a fully decoupled full-stack intelligent computing solution: intelligent computing servers are compatible with mainstream CPUs/GPUs at home and abroad, provide nationally produced 100G and 200G network cards, and will launch a nationally produced DPU card supporting 100G lossless networks this year, and have released a full-box 400G with a business scale of thousand-calorie-level GPU/single POD resource pool Fabric network solutions: A new generation of 400G Fabric products will be released in 2024, and the next-generation 800G Fabric will be deployed in advance.
The above product series can meet the needs of ultra-large-scale GPU networking and model training, diversified computing power inference, and strive to build an open and decoupled ecosystem. The intelligent computing solution includes two forms: intelligent computing resource pool and AiCube training and pushing all-in-one machine, which can flexibly meet customer needs in different scenarios.
In the field of large models, the company adopts the "1+N+X" strategy, in which the Nebulas large model adopts both self-research and ecological cooperation, and on this basis, pre-trains "N" domain large models through domain knowledge increments, including R&D code large models, communication large models, government affairs large models, campus large models, etc., and then derives "X" applications, realizes R&D efficiency internally, and accelerates the digital and intelligent transformation of the industry externally with large model technology. For example, the large code model has played an important role in the company's research and development, improving the coding efficiency by 30%, and the communication large model has been implemented in the fields of network assurance, cross-domain problem closed-loop, problem perception processing, encrypted short video perception evaluation, and intelligent anti-fraud by combining digital twin and large and small model collaboration.
2. Continue to introduce top talents, the R&D team remains stable, and the R&D focus is on connection and computing power
ZTE has always attached great importance to the investment of R&D resources and R&D efficiency, and the company's R&D capabilities and efficiency are in the leading position in the industry. Based on the assembled consistent R&D governance structure of Digital Nebula, the company realizes the componentization of capabilities and the standardization of interfaces, maximizes internal sharing, and maximizes external extension.
In 2023, the company's annual R&D investment will exceed 25 billion yuan, accounting for 20.4% of operating revenue. In 2024, the company will continue to increase the introduction of top talents, promote the continuous improvement of the team's innovation ability and overall quality, and strive to maintain the overall stability of the R&D team.
The company's R&D investment mainly focuses on the underlying core technologies and intergenerational evolution of products, such as chips, algorithms, architectures, etc., to ensure long-term advantages, and at the same time flexibly match market and customer needs to achieve rapid iteration and adaptation. At present, the company focuses on two major areas: connectivity and computing power. In the field of computing power, in response to the wave of artificial intelligence and large models, we have increased investment in the research and development of computing products and solutions, launched a variety of intelligent computing servers and a new generation of high-performance 400G/800G data center switches, etc., and developed our own Nebula large model to build a 1+N+X system.
In 2024, ZTE will continue to strengthen its R&D capabilities, expand 5G-A innovation, application and practice, continue to strengthen all-optical networks, computing infrastructure, large model R&D and other fields, actively deploy cutting-edge technologies, drive development with innovation, and continue to contribute leading technologies and products to the industry.
3. Keep up with the needs of global network construction and promote the layout of 5G-A technology
China leads the world in the construction of 5G, covering network scale, technology application and business expansion. With the continuous development of 5G and the construction of diversified scenarios, ZTE's products and solutions continue to innovate, and its competitiveness has been significantly enhanced. The long-term accumulated technological advantages will be extended to 5G-A and the future 6G stage.
As the key to the evolution of 5G, 5G-A aims to provide higher data rates, lower latency, wider connectivity, and smarter networks to meet the growing demand for digitalization. With the establishment of the 3GPP Release 18 project, the technology development and standard formulation of 5G-A have entered the stage of comprehensive acceleration. ZTE is "moderately ahead" in 5G-A investment, continues to make innovative breakthroughs in core technologies such as chips and algorithms, and is deeply involved in the formulation of global 5G-A standards.
The company has carried out technical layout for the six major scenarios of 5G-A, and released multi-scenario support products for technical verification. In terms of capability enhancement, the company has realized the evolution of intermediate frequency from 64TR to 128TR, doubling the network capacity, introducing RedCap technology to reduce costs and power consumption, and promoting the Internet of Things of 100 billion, providing 4 millisecond low latency, 5 9 high reliability, and microsecond low jitter capabilities, enhancing network certainty and helping the development of the industrial Internet. In terms of scenario expansion, the company pioneered the integrated single AAU synaesthesia technology and completed the first 5G-A integrated networking verification test, deployed NTN technology and completed the first domestic 5G NTN mobile phone directly connected to the satellite field test to achieve all-round coverage, and integrated 5G and AI technologies to provide operators with efficient resource management and network operation solutions.
The industry generally believes that 2024 will be the first year of commercial use of 5G-A. China Mobile plans to launch the world's largest 5G-A commercial deployment in more than 300 cities, with the goal of achieving full commercial use by the end of 2026. In terms of network, it is expected to achieve large-scale commercial use of RedCap and three-carrier aggregation in 2024, and promote the trial commercial deployment of five major technologies, including synaesthesia integration and passive Internet of Things. Operators around the world, including the Middle East, Europe, Asia-Pacific, and Latin America, are also accelerating the verification of 5G-A capabilities. ZTE keeps up with customer needs and is fully prepared for the arrival of the 5G-A era.
4. Focus on low-carbon and intelligent, and tap the potential of digital energy business
As sustainable development has become a global consensus, decarbonization and digitalization have become key development paths. Digital energy is a long-term track and an important component of the company's innovative business. The company has a comprehensive layout of digital energy, covering many key areas such as communication power supply, energy storage and data center support.
In terms of communication power supply, the company has successfully commercialized the industry's highest power density rectifier, leading the world in power density and efficiency. In 2023, the company's communication power supply products will maintain a leading position in the domestic operator market, achieve an increase in share in the international operator market, and maintain growth in the overall shipment volume.
In the field of energy storage, with more than 30 years of accumulation of power electronics technology, the company has expanded the communication energy storage business and laid out the power energy storage market. In terms of communication energy storage, the company has developed a full range of lithium battery products with excellent performance and has become the top supplier in the industry. At the same time, the company also cooperates with customers to launch hydrogen fuel cell, photovoltaic and energy storage hybrid energy solutions to help reduce carbon emissions. In terms of power energy storage, the company plans a full range of string distributed photovoltaic inverters and other products, which are expected to be launched to the market in 2024.
In terms of data center supporting business, the company is committed to building a stable, efficient and low-carbon new generation of fully modular data centers, and improving energy efficiency and reducing energy consumption through flexible power supply and elastic cooling technology innovation. In the Binjiang Intelligent Computing Center project, the company successfully achieved excellent performance with a minimum PUE of 1.1.
Looking ahead, the company's digital energy business will continue to focus on low-carbon and intelligent. On the one hand, we will build an end-to-end energy infrastructure network for customers, and help customers build an end-to-end green and low-energy consumption network through full-scenario energy and data center supporting product and solution innovation, and on the other hand, we will intelligently optimize the entire energy chain of energy generation, transfer, storage, use, and management through energy digitalization technology, make full use of green energy, and improve the utilization rate of the energy network.
5. Accelerate the development of new quality productivity and maintain the steady growth of domestic operators' network performance
In 2024, the capital expenditure plan of the three major domestic operators will decline slightly, wireless investment will begin to decrease, and investment in computing networks will continue to increase, and the company's performance growth will face challenges, but the company is confident that it will maintain steady growth in performance.
First of all, adjust the structure and resist risks. The company has been rooted in the domestic operator market for many years, has a deep understanding of the life cycle of wireless network construction, and has full expectations for the network construction scale to enter a steady contraction after the peak period. The company continued to increase investment in transmission, fixed network, home terminals and other fields, and established a second curve development strategy from 2021, following the pace of cloud-network transformation of operator customers, and actively expanding second curve products such as servers, intelligent computing, data centers, switches, and 5G industry applications. The company's performance structure has become more balanced in the past two years, and its ability to respond to changes has been greatly strengthened.
Second, adjust the strategy and seek development. Under this structural adjustment, the company is accelerating the shift from full connectivity to "connection + computing power", which is in line with the country's macro policy orientation of "focusing on new quality productivity, enhancing new development momentum, and greatly improving total factor productivity". It is in line with the development strategy of digital and intelligent transformation of domestic operators.
In 2024, the company will adhere to the business strategy of "precise and pragmatic and steady growth", on the one hand, pay attention to the construction of new information infrastructure and new information service system for operators, and fully expand the market space in the fields of 5G, gigabit optical network, and computing power network.
Among them, in the field of 5G, we will seize the opportunity of the country to promote signal upgrading and broadband frontiers, cooperate with operators to do a good job in network investment planning, expand the overall construction scale, and strengthen and thicken regional networks. Second, by leveraging the advantages of products and solutions, we will actively cooperate with operators to increase the coverage of indoor, high-speed rail, frontier, and maritime scenarios, and steadily increase market share.
In addition, it is expected that 5G-A will enter the commercial deployment stage in 2024, and the company will actively cooperate with operators to carry out technical verification, and make a strategic layout in the market in advance in the technical directions that are expected to enter the landing stage, such as global synaesthesia, NTN, and Redcap, to support the future development of the company's wireless products.
In the field of gigabit optical networks, we will seize the opportunity to launch matching products and solutions in a timely manner, further optimize the market structure of 400G OTN, core routers, 10G PON, FTTR and other products, and steadily increase market share.
In the field of computing power networks, at present, all walks of life have gradually strengthened the construction of intelligent computing, and the deployment of intelligent computing by operators will also be in full swing and maintain a long construction period.
Second, the company will cooperate with operators to promote the wide application of digital intelligence technology, jointly expand the commercial market, seek incremental performance, and help upgrade the new productivity of traditional industries and the implementation of digital intelligence technology in emerging industries with the core capabilities of connection + computing power, so as to expand new business opportunities. To this end, the company has established a new business team to build a full-stack solution for industry applications based on all-optical networks and connections, adding capabilities such as video, AI, security, and cloud terminals, focusing on education, parks, industrial manufacturing, and medical care, and working with operators to carry out comprehensive business development. At present, the company's self-developed digital Nebula industry digital solutions have taken root in many fields such as steel, mining, and agriculture, helping the formation of new quality productivity in the whole society.
In 2023, the company's operator market and government and enterprise market will merge to form domestic marketing, which will help the company fully grasp the opportunity of operators' strategic transformation while maintaining the competitiveness of traditional operators' network business, actively expand emerging businesses in the fields of cloud network and computing power, quickly cultivate second-curve products, and help accelerate the expansion of domestic government and enterprise services.
6. Firmly develop consumer business and increase the layout of AI mobile phones
The company's consumer business, which includes home terminals and mobile phone products, is an important part of the company's end-to-end complete communication solutions, and is also one of the directions to support future business growth.
In terms of home terminals, in the domestic market, the company's household terminal income will achieve good growth in 2023. In 2024, domestic operators will continue to accelerate the construction of all-optical networks, and it is expected that the proportion of FTTR investment in home terminals will further increase. The company will grasp the high-speed development opportunity of "Gigabit + FTTR" and continue to maintain the growth trend of major products such as optical modems, Wi-Fi routers, and set-top boxes.
In the international market, in 2023, affected by factors such as high inventory and intensified competition among international operators, household terminal income will decrease. In 2024, the recovery and improvement of the international home terminal market will be driven by the gradual return of operators' inventories to normal, improved procurement demand, and the advancement of AI and the popularization of video applications such as Sora, which will accelerate bandwidth consumption and increase broadband quality requirements. The company will rely on technology leadership, as well as strong customization and supply capabilities, to achieve revenue growth targets in the international market in 2024.
In terms of mobile phone products, in 2023, the overall revenue of the company's mobile phone products will achieve steady growth, but the international market is facing pressure from high inventory and longer user replacement cycles. In 2024, global mobile phone shipments are expected to pick up, and the company will continue to deploy cutting-edge core technologies and launch competitive products around the strategy of differentiated innovation and cost leadership, and strive to achieve better growth. In the mid-to-high-end market, we will pursue differentiated innovation, create brands, focus on segmentation, and achieve industry leadership in the fields of mobile imaging, gaming and e-sports, and in the entry-level market, we will adhere to cost leadership and scale, and grasp the market opportunities of global 2G/3G to 4G/5G and entry-level smart phone upgrades to achieve growth. In addition, the company will also keep up with the AI wave and increase the layout of AI mobile phones.
It is expected that in April 2024, the company will release a number of new Nubia AI mobile phones, and in the middle of the year, it will also release the first AI flagship mobile phone. In the future, based on the ZTE Nebula OS system, the company will realize the access of various services to a unified AI platform, integrate large models, big data and 3D technology, and carry out full-stack empowerment in imaging, performance, security and other aspects. In addition, it will also cooperate with Internet manufacturers and operators to provide users with richer application scenarios and better product experience.
7. Keep up with the three major changes of investment, competition and self-operation to achieve benign and steady growth in the international market
In 2023, from the perspective of market investment, the investment in operator networks in the international market will increase slightly, and the overall market size of consumer terminals will decline due to the sluggish demand caused by the economic downturn. From the perspective of competition, the company has maintained a strong competitive advantage in the competitiveness of wireless, optical transmission, fixed network home and other products. From the perspective of its own operation, the company has broken through the core area of many large T branches by virtue of its accumulated product and program advantages.
In 2024, in terms of market investment, according to Gartner's forecast, international operators' network investment will continue to grow in 2024, at present, optical fiber in Europe and Africa is accelerating, 4G modernization and 5G construction in Africa and Latin America are still the focus, at the same time, operators' demand in data centers and green energy fields is also increasing, and on the consumer terminal side, market demand has recovered from the end of 2023 to the first quarter of 2024.
To this end, in terms of competition, the company will launch a number of competitive products for overseas markets, such as AI-enabled simplified, green and efficient wireless site solutions to further enhance the competitive advantage of wireless products, the industry's only pluggable optical module 800G backbone transmission solution, including WiFi 7 series products, FTTR solutions to meet the growing demand for traffic and optical fiber, liquid-cooled cabinets and series of server products to meet the growing needs of overseas data center construction, and more cost-effective smartphones will be launched to expand the 2C market.
In terms of its own operation, the company will firmly focus on the strategy of big countries and big T, continue to increase the proportion of revenue of big big T, and promote the expansion of new business overseas by simplifying new business processes. In terms of traditional services, the continuous consolidation of operator networks in Southeast Asia, the modernization of wireless networks in Africa and Latin America, and the construction of fixed networks will bring new opportunities to improve the market structure, and the company will further enhance the market structure through these key battles under the guarantee of product competitiveness; in terms of new business, the company will continue to invest in overseas broadband speed-up, data center construction and new energy construction, and pursue rapid growth in overseas new services; in terms of terminal business, as market demand picks up, terminals will challenge higher targets overseas.
8. Pay attention to shareholder returns and continue to increase cash dividends
In 2023, the company will significantly increase the dividend ratio, mainly based on three considerations: first, firmly implement the action plan of "double improvement of quality and return" advocated by the Shenzhen Stock Exchange, second, the company's profitability will continue to improve, achieve good operating performance, and lay the foundation for returning shareholders; third, the company attaches importance to shareholder returns, increases cash dividends, and shares the company's development achievements with investors.
The company's cash dividend plan for 2023 is 6.83 yuan for every 10 shares, and the total cash dividend to be distributed is expected to be about 3.27 billion yuan, and the company's cash dividend ratio has continued to grow in the past five years, from 17.9% in 2019 to 35.0% in 2023, with a total cash dividend of nearly 8.5 billion yuan.
The company will actively implement the "long-term, stable and sustainable" shareholder value return mechanism, maintain the consistency, rationality and stability of the cash dividend policy, so that investors can have a real sense of investment gain, and help the stable and healthy development of the capital market.