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.


INTERVIEW: SABB Managing Director David Dew steering through historic transaction in Saudi banking

Updated 20 October 2018
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INTERVIEW: SABB Managing Director David Dew steering through historic transaction in Saudi banking

DUBAI: David Dew has been working in banking in the Middle East and other emerging markets for 40 years, and you might think he has seen it all. But the merger between SABB and Alawwal in Saudi Arabia — which he is steering through to completion next year — is a career achievement for him.
“I think it’s a clear case of a win-win situation, and all our stakeholders will get benefit from it. It’s a genuinely exciting landmark transaction, and a significant transformation for the Kingdom,” he said.
It is a historic transaction, Dew explains. “It is the third biggest banking merger in the history of the region — the other two were in the UAE with significant government ownership — so SABB-Alawwal is also the biggest private banking merger for 20 years. It’s the first since the Capital Market Authority (CMA) was formed and the first since the new takeover rules came in.”
The merger will create the third biggest bank in the Kingdom by assets, loans and deposits, and — perhaps more significant in the current financial environment — forge a bank that is unashamedly international in its outlook. The transaction has its origins in the different imperatives of foreign banks operating in the Kingdom. Saudi Arabia has been identified as a global growth market by HSBC, which holds 40 percent of SABB — full name the Saudi British Bank.
Alawwal — the “first bank” in Arabic, reflecting its long heritage in the Kingdom — was dominated by a consortium of foreign banking interests, notably cash-strapped RBS (Royal Bank of Scotland) of Britain. RBS and its consortium partners — from Spain and Holland — wanted to reduce their overseas footprint. Getting out of Alawwal was a logical move from that perspective.
RBS and the Spanish bank Santander — which would each have about 4 percent of the enlarged company — have undertaken not to sell their shares for six months after completion.

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BIO

 

Born: Farnborough, UK, 1955

Education

•Farnborough Grammar School

•University of Cambridge, MA in Economics

Employment

•British Bank of Middle East, Oman

•Various positions around the world with HSBC

•Managing director, SABB

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The foreigners’ different strategic interests might have been the original spark for the merger, but Dew firmly believes it is in the best interests of the Saudi banking business, and bank customers. “Our first stakeholder is the Kingdom, and the merger is a great example of why and how Vision 2030 is actually working. It’s showing that Saudi Arabia is open for business. An important part of the Vision plan is the financial sector development program, and this merger shows it is working.
“The idea is to grow and develop capital markets, and this will help the Kingdom do that. It’s the kind of thing that just might not have happened even a few years ago.”
The next set of stakeholders he is working to satisfy is the regulatory establishment. The deal has been quite a long time in gestation, and much of that time has been taken up in getting it just right from a regulatory standpoint. “It’s taken a bit longer than you might have expected, but the regulators have been with us all the way — the CMA, the Saudi Arabian Monetary Authority, and the Ministry of Finance. All good things take time, and it is more important to do it right than to do it quick,” he said.
The next key group of stakeholders are the shareholders on both sides. In addition to HSBC and the RBS consortium, there are big investors in both banks in the shape of the Olayan conglomerate, and the government agency the General Organization for Social Insurance. Both have recused themselves from involvement in the merger negotiations. But both boards have recommended the merger terms.
“We’ve explained the business rationale and made a compelling case to them that the merger creates value. There will be a circular from both parties to all shareholders, we hope, by the end of the year.”
The next stakeholders on the list are the customers. “I know it’s a cliche that the customers are all important, but it’s true, and they will see real benefits,” Dew said.
Comprising as much as 75 percent of the new bank’s business, the corporate sector will be crucial. “It will be the leading corporate bank by lending, and will offer other products, too, for example trade finance. It will also be the leading cash management business, and a significant foreign exchange provider.
“I think it will occupy a powerful corporate position and overall will be a bellwether for the underlying economy, so it will be followed closely by anybody interested in the Kingdom’s business,” Dew explained. With a market capitalization of about SR65 billion ($17.33 billion) and a sizeable free float on the Tadawul, it will be valuable proxy for investment in the modernizing Kingdom.
The new bank will also use its connection with HSBC’s powerful investment banking operation in Saudi Arabia to help satisfy customers’ needs in that segment.
In the retail sector, it will never be as big as NCB or Al Rajhi, market leaders with more than 50 percent of the retail market between them. But with about 10 percent of the Kingdom’s retail market, Dew feels it will be approaching the “tipping point” at which it becomes a serious player.
“The home loans market is critical. We estimate we’ll have 16 percent of that market, which is vitally important to the changes that are happening in the Kingdom,” he said. It will also have around 20 percent of the Saudi credit card market, he estimated.
“We will redouble our efforts to offer a good SME (small and medium-sized enterprises) proposition. SABB has not done enough in this sector, but we will do more, and the ability to do it will be enhanced by the merger,” he added.
“For corporate customers, we will be able to offer the biggest balance sheet and underwriting capability, which adds up to more ‘muscle’ for corporate clients. For retail customers, we will offer additional scale and focus, especially on the digital side. This is the future for the retail banking business, and we will build on Alawwal’s strengths here. They are pretty good in digital already. They have punched above their weight,” Dew said.
The final group of stakeholders are the employees. “Again it is trite to say ‘We are nothing without our people,’ but I happen to believe it. We have promised and we mean it, that there will be no involuntary redundancies. That does not mean there will be no losses through attrition. People come and go all the time, so that is only natural,” Dew said.
The new bank will have 4,800 employees, more than 90 percent of them Saudi citizens and 20 percent women. Its new chairperson will be Lubna Olayan, head of the eponymous conglomerate and one of the leading business figures in the Kingdom. “She has a track record in business, leadership expertise and international connectivity. To have somebody like that as chair of the new bank is an incredibly powerful statement. She will also be the first female chair of a listed Saudi company,” said Dew, who will be managing director of the new entity.
The bank will start operating in what Dew sees as an improving economic and financial environment in the Kingdom, with the long-promised privatization and initial public offering program materializing. “Two years ago, growth and bank lending were falling. In 2018 there has been a modest but significant improvement, and I do believe next year is going to show further improvement.”
On the geopolitical background, always a big factor in the business climate in the region, he brings a historical perspective to bear.
“When I came here 40 years ago, Israel-Palestine was the big issue. Since then, the region has become even more complicated and volatile. But business has navigated through these problems and I’m confident it will do so again. It’s all about having strong foundations,” he said.