Ericsson swings to profit as savings kick in; shares jump

Ericsson’s shares have gained more than 36 percent in the year to date. Above, the company logo fronts Ericsson’s headquarters in Stockholm. (Reuters)
Updated 18 July 2018
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Ericsson swings to profit as savings kick in; shares jump

  • The Swedish mobile telecom gear maker has met an industry-wide downturn and mounting losses by sweeping cost cuts
  • Bolstering investor optimism are expectations that Ericsson is on the cusp of a new cycle of network upgrades

STOCKHOLM: Mobile telecom equipment maker Ericsson unexpectedly swung to a modest operating profit in the second quarter, boosted by growing sales in North America and said it was increasingly confident of meeting its longer-term targets.
The Swedish mobile telecom gear maker has met an industry-wide downturn and mounting losses by sweeping cost cuts, clearing out most of its top management and setting a strategy to focus on profitability over growth.
It had been in the red since the third quarter of 2016 and its return to profit sent its shares up 10 percent by 0816 GMT. “A trend of good execution (is) starting to emerge,” UBS analysts said of the latest results.
Bolstering investor optimism are expectations that Ericsson is on the cusp of a new cycle of network upgrades as demand for next-generation 5G gear kicks in later this year or early in 2019, starting in the United States.
Its shares have gained more than 36 percent in the year to date, buoyed by progress toward meeting its 2020 financial targets and hopes for a 5G-led industry growth cycle.
Marking its second consecutive quarter of substantial progress toward hitting its 2020 financial goals, the Swedish firm reported an operating profit of 0.2 billion crowns ($23 million), excluding restructuring charges of 2.0 billion crowns.
The operating profit compared to a 0.5 billion loss in the year earlier quarter. Analysts, on average, had forecast an 0.1 billion loss for the second quarter in a Reuters poll.
“We have good market traction in Networks, with a sales growth of 2 percent, particularly in North America where all major operators are preparing for 5G,” CEO Borje Ekholm said in a statement.
Networks, which accounts for two-thirds of Ericsson sales, rose 2 percent, year on year, buoyed by 15 percent growth in North America, Ericsson’s largest market. But they fell around 5 percent in South and Southeast Asia, North East Asia and the Middle East and Africa. Europe grew just 1 percent.
Ericsson appears to be benefiting from rising competition among the four top US carriers, which are all racing to be the first to deliver 5G in dozens of American cities. 5G has become a test of US technology leadership in the country’s growing stand-off with China over trade and national security.
Overall, Ericsson’s net sales dipped 1 percent in the second quarter compared to a year ago, reflecting the bottoming out of sharp declines for the mobile equipment industry since 4G sales peaked in 2015 and the expectation of a return to growth in 2020.
Ericsson Chief Financial Officer Carl Mellander said the company was focused on meeting its 2020 profitability targets but warned that quarterly results may still be up and down.
The CFO said that while the first commercial use of 5G would kick off later this year, the business was largely being driven by North America. “But material volumes... we maintain that will be in 2020,” he cautioned.
Ericsson, once the world’s biggest supplier of mobile communications gear, is facing falling spending by telecom operators, weakness in formerly fast-growing emerging markets and stiff competition from bigger telecom equipment players Huawei of China and Nokia of Finland.
The company said it had recently finished an annual cost-cutting program that saved more than 10 billion crowns, which would increasingly result in higher earnings.
Its second quarter gross margin, excluding restructuring charges, was 36.7 percent, versus 35.9 in the first quarter, driven mainly by cost reductions across its business divisions and the ramp-up in sales of its flagship 5G-ready radio gear.
The company has pledged to deliver a gross margin of 37-39 percent and an operating margin of at least 10 percent by 2020 and better than 12 percent heading into the next decade.


Dubai real estate market recovery to be seen as of 2022: S&P

Updated 20 February 2019
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Dubai real estate market recovery to be seen as of 2022: S&P

  • The outlook on property was part of a challenging assessment of the credit-worthiness of the emirate
  • S&P was generally comfortable with the credit ratings of the emirate’s banking system

DUBAI: S&P Global, the ratings agency, painted a grim picture for the real estate sector in Dubai, with a meaningful recovery in property prices expected only after 2022.
At a presentation to journalists in the Dubai International Financial Center, S&P analyst Sapna Jagtiani said that under the firm’s “base case scenario,” the Dubai real estate market would fall by between 5 and 10 percent this year, roughly the same as the fall in 2018, which would bring property prices to the levels seen at the bottom of the last cycle in 2010, in the aftermath of the global financial crisis.
“On the real estate side we continue to have a very grim view of the market. While we expect prices to broadly stabilize in 2020, we don’t see a meaningful recovery in 2021. Relative to the previous recovery cycle, we believe it will take longer time for prices to display a meaningful recovery,” she said.
S&P’s verdict adds to several recent pessimistic assessments of the Dubai real estate market. Jagtiani said that conditions in the other big UAE property market, in Abu Dhabi, were not as negative, because “Abu Dhabi never did ramp up as much in 2014 and 2015 as Dubai.” S&P does not rate developers in the capital.
She added that a “stress scenario” could arise if government and royal family related developers — such as Emaar Properties, Meraas, Dubai Properties and Nakheel — which have attractive land banks and economies of scale, continue to launch new developments.
“In such a scenario, we think residential real estate prices could decline by 10-15 percent in 2019 and a further 5-10 percent in 2020. In this case, we expect no upside for Dubai residential real estate prices in 2021, as we expect it will take a while for the market to absorb oversupply,” she said.
S&P recently downgraded Damac, one of the biggest Dubai-based developers, to BB- rating, on weak market prospects.
However, Jagtiani said that, despite the “significant oversupply” from existing projects, several factors should held stabilize the market: Few, if any, major product launches; improved affordability and “bargain hunting” by bulk buyers; and a resurgence of Asian, especially Chinese, investor interest in the market.
Jagtiani also said that government measures such as new ownership and visa regulations and reduction in government fees could help prevent prices falling more sharply, as well as “increased economic activity related to Dubai Expo 2020, which is expected to attract about 25 million visitors to the emirate.”
The outlook on property was part of a challenging assessment of the credit-worthiness of the emirate. “In our view, credit conditions deteriorated in Dubai in 2018, reducing the government’s ability to provide extraordinary financial support to its government related entities (GREs) if needed,” S&P said in a report. “The negative outlook on Dubai Electricity and Water
Authority (DEWA) partly reflects our concern that a real estate downturn beyond our base case could out increased pressure on government finances,” the report said.
It pointed out that about 70 percent of government revenues come from non-tax sources, including land transfer and mortgage registration fees, as well as charges for housing and municipality liabilities, as well as dividends from real estate developers it controls, like Emaar and Nakheel.
S&P was generally comfortable with the credit ratings of the emirate’s banking system, which has an estimated 20 percent exposure to real estate. “Banks in the UAE tend to generally display a good level of profitability and capitalization, giving them a good margin to absorb a moderate increase in risks,” the report said.