Smartphones: better kit could depress long-term growth
Extended ownership and less consumer Fomo is bad news for the entire sector
Mobile phone operators once successfully instilled the fear of missing out into their customers, encouraging the replacement of smartphones for the latest models every two years. Network phone subsidies helped keep shipments and earnings at global phonemakers strong. Industry data for past year suggests that is ending.
Global smartphone shipments dropped 18.3 per cent — the most on record — to about 300mn units in the December quarter, according to research group IDC. For the year shipments fell 11.3 per cent, the lowest total for a decade.
Blame temporary disruptions resulting from year-end violent protests over Covid-19 restrictions at Apple’s main iPhone factory in China. Price inflation and slowing global economic growth too affected holiday shopping. Buyers increasingly seek cheaper, older models.
But there is good reason to believe that the poor shipment figures are part of a longer lasting trend. Seven years ago, two-thirds of US consumers replaced their smartphones in two years or less. That gap has widened to about three years owing to more durable materials and increased software updates. Pricier Apple and Samsung flagship models have created a robust market for second-hand phones.
Longer ownership offers green perks. Consider that 80 per cent of a smartphone’s carbon footprint is created during manufacture. About 5bn mobile phones are thrown away each year. Not all parts can be recycled and some can release toxic chemicals.
All this is bad news for the companies. The iPhone is Apple’s most important product, accounting for about half of overall revenue. Samsung Electronics earned more than 40 per cent from its mobile business in the third quarter 2022. Shares of both companies are down a tenth in the past year, reflecting waning demand.
There will be knock-on effects on a larger range of sectors. The duo are the main clients for component makers (flash memory through displays) in Japan, Vietnam, China and South Korea. Less consumer Fomo means more oh-no for the entire smartphone industry.
Gapping down
In reaction to earnings/guidance:
- HZO -9.5%, LC -9.4%, SHW -8.9%, WOLF -6.7%, DEO -6.2%, AZPN -5.3%, SAP -4.1%, BOOT -4%, MKC -3.7%, VIRT -3.4%, CCI -3.3%, DOW -3.3% (also outlines series of targeted actions aligned to its previously stated plan to achieve $1 bln in cost savings in 2023), PLXS -2.9%, TER -2.8% (also authorizes new $2 bln share repurchase program), CLS -2.7%, LUV -2.3%, IBM -2% (also will cut about 3,900 jobs, according to Bloomberg), WBS -2%, LRCX -1.5% (also commences 7% workforce reduction), NOW -1.4%, VLY -1.4%, LCII -1.2%, CSX -1.2%, FLEX -1.1%, TROW -0.8%, CMCSA -0.7%, BX -0.7%, JBLU -0.7%
Other news:
- FNA -10.9% (prices offering of 6.5 mln shares of common stock at $17.00 per share)
- SNX -7.4% (prices secondary offering of 4.5 mln shares of common stock at $97.00 per share)
Analyst comments:
- LC -9.5% (downgraded to Neutral from Buy at Janney)
- BPOP -0.8% (downgraded to Mkt Perform from Outperform at Keefe Bruyette)
- H -0.7% (downgraded to Equal Weight from Overweight at Wells Fargo)
Gapping up
In reaction to earnings/guidance:
- XM +29.9%, STX +9.2%, MBLY +8.5%, TSLA +7.1%, LEVI +6.4%, CNX +4.8%, ETD +4.4%, URI +4.4% (also initiates dividend; also plans to restart its share repurchase program), STM +4.3%, LVS +3.9%, TSCO +3.8%, ROK +3.6%, NOK +3%, XRX +2.8%, BHLB +2.3%, HXL +2% (also increases dividend), AXS +2%, AAL +2%, XEL +1.7%, ADM +1.6%, CALX +1.3%, AIT +1.3%, AXTA +1.2%, NOC +1.1%, RLI +1%, LBRT +1%, NTCT +1%, PLUG +0.9%, STLD +0.8%, MUR +0.6%, VLO +0.6%, CNS +0.5%
Other news:
- ACIU +11.5% (ACI-24.060 Anti-Amyloid Beta Vaccine for Alzheimer's Shows Positive Initial Interim Safety and Immunogenicity in Phase 1b/2 ABATE Trial)
- DV +8.2% (to join S&P SmallCap 600)
- LTRX +4.5% (announces record $40 mln contract with Gridspertise)
- CVX +3.3% (authorizes new $75 bln share repurchase program; also increases dividend)
- ET +2.4% (increases dividend)
- BHLB +2.3% (names new CFO; also authorizes new $50 mln share repurchase program)
- NKLA +1.9% (introduces new hydrogen energy brand "HYLA")
Analyst comments:
- FGEN +3.5% (upgraded to Outperform from Mkt Perform at Raymond James)
Blackstone says property fund withdrawals continue as profits fall
President of alternative asset manager says ‘tone’ of conversations with investors ‘is much improved’
Blackstone is facing ongoing redemption requests from its $69bn real estate investment fund, which limited withdraws at the end of last year as investors rushed to pull cash from the world’s largest alternative asset manager.
Jonathan Gray, president of Blackstone, said in an interview with the Financial Times that it was “a little early” to say redemption requests were slowing at the fund, called Blackstone Real Estate Income Trust, or Breit.
“We have a backlog from November and December,” said Gray. “I will say the tone of the conversations with our advisers is much improved.”
In December, Blackstone limited investor withdrawals from the fund, as investors grew concerned about the long-term health of the property market.
Breit is designed to give wealthy investors exposure to the New York-based group’s sprawling portfolio of commercial real estate properties such as warehouses, apartment buildings and office towers.
The fund has attracted tens of billions of dollars in assets in recent years, fuelling fee and asset growth inside Blackstone.
However, the rapid and sustained redemption requests that kicked off last summer have underscored the risks of offering liquidity for illiquid assets and may drive changes to the way Blackstone builds such funds.
“I think there will be an evolution of private wealth products,” said Gray. “This product has worked as designed, but can there be tweaks that improve things? Sure.” Gray noted that newer funds didn’t allow monthly redemptions.
In fourth-quarter results released on Thursday, Blackstone posted a sharp drop in profits as its fee-based earnings were hit by falling performance at Breit and worsening economic conditions.
Blackstone’s fee-related earnings, a proxy for the management fees it earns, plunged 42 per cent to $1.1bn. Its distributable earnings — a metric that is favoured by analysts as a proxy for overall cash flows — fell a similar amount to $1.3bn. On a per-share basis, the results either met or exceeded analyst forecasts polled by Bloomberg.
The decline in fee-based earnings was caused by a sharp drop in incentive fees — profits Blackstone makes once it has achieved a certain level of return for investors — earned by Breit due to falling performance and an accounting change.
Blackstone marked Breit down by about 1.5 per cent during the quarter, meaning the fund did not earn significant incentive fees. “Nobody was immune to a higher cost to capital and higher cap rates, but we saw really strong cash flow growth,” said Gray of Blackstone’s property portfolio.
At the beginning of 2022, Blackstone began recording incentive fees earned by Breit on a quarterly basis, instead of an annual basis.
Had the policy been in place in 2021, Blackstone’s fee-related earnings would have declined 19 per cent, due to the lack of incentive fees.
Blackstone shares initially tumbled sharply when Breit limited withdrawals, but they have recovered most of their losses, fuelled by a broad market rebound and a $4bn investment made by the University of California into the fund this month. On Wednesday, the university invested a further $500mn into Breit.
Institutional investors such as UC continue to pour money into Blackstone, which raised more than $43bn for the quarter, propelling overall assets under management to a record $975bn.
Gray said he remained optimistic about the long-term opportunity in attracting new assets from wealthy investors despite the troubles at Breit.
He said that while only 1 per cent of the $85tn in wealth available to be invested was in alternatives, that would rise over time.
“I remember in the 2008 and 2009 time period, people saying institutions wouldn’t invest in alternatives anymore. Obviously, that didn’t prove to be the case,” said Gray.
U.S. Leans on Turkey to End Russian Flights With American-Made Planes
Pressure campaign is a test of whether Washington can enforce sanctions
ISTANBUL—U.S. officials are pressuring Turkey to stop Russian airlines from flying American-made airplanes to and from the country, said officials familiar with the talks, signaling a new push in Washington to persuade countries to enforce sanctions imposed on Moscow after its invasion of Ukraine last year.
Senior American officials warned last month that Turkish individuals are at risk of jail time, fines, loss of export privileges and other measures if they provide services like refueling and spare parts to U.S.-made planes flying to and from Russia and Belarus in violation of export controls imposed last year, the officials said. Assistant Secretary of Commerce Thea Rozman Kendler delivered the message to Turkish officials during a December visit to Turkey, the officials said.
The warning to Turkey is a key test of whether the U.S. and its allies can succeed in isolating Russia over the long term, or whether Moscow can find a way to continue economic activity with the help of third countries that are central to the Kremlin’s strategy of finding partners outside of the West. The Turkish Foreign Ministry didn’t respond to a request for comment on the warning.
“At a certain point, they will have to take an enforcement-related action,” said Emily Kilcrease, a former deputy assistant U.S. trade representative and currently a senior fellow at the Center for a New American Security in Washington. “Otherwise the whole kind of thing falls apart, if it turns out they have knowledge of violations and they haven’t been able to do anything to address it.”
A Department of Commerce spokesman said the agency couldn’t comment on specifics. He said the agency’s Office of Export Enforcement recently warned overseas aviation companies about complying with U.S. export controls involving the servicing of Russian, Belarusian and Iranian commercial aircraft.
“This action and ongoing engagement like Assistant Secretary Kendler’s visit is important to U.S. efforts to ensure understanding of our controls, encourage partnership and compliance, and to share information,” the spokesman said.
The Biden administration imposed export controls barring Russia from using U.S.-made aircraft last February in response to the attack on Ukraine. The export controls now bar any aircraft made in the U.S. or those that include more than 25% U.S.-controlled parts from flying into Russia or Belarus without a license issued by the Commerce Department’s Bureau of Industry and Security.
Russian airlines have continued flying Boeing Co. jets in defiance of U.S. and European Union efforts to ground them, including sanctions that restrict the entry of Russian-operated jets to Western skies, the supply of spare parts needed to safely maintain the aircraft and the revocation of aircraft-leasing contracts.
Russian and Belarusian airlines, including Moscow’s majority state-owned Aeroflot, have operated more than 2,100 flights using U.S.-made planes including Boeing 777s, 757s and 737s to Turkey since Oct. 1, according to data from aviation-analytics firm Cirium. The flights include regular trips from Moscow to Turkish destinations including Istanbul, Izmir and the Mediterranean resort city of Antalya.
The warning comes as the U.S. government moves to shore up sanctions against Russia nearly a year after it began its full-scale assault on Ukraine. U.S. officials are aiming to prod countries with economic ties to Russia—like Turkey and the United Arab Emirates—to do more to comply with the sanctions, which are intended to starve the Russian government of funds and key technologies it could use to wage war.
The continued Russian flights have raised safety concerns since Washington’s export controls ban the sale of spare parts needed to repair Russia’s civilian airline fleet.
Most of Russia’s civilian aircraft are manufactured by Boeing and Airbus SE and leased from companies in Ireland and Bermuda. Last March, Russian President Vladimir Putin signed a new law allowing airlines to re-register planes in Russia, making them harder to repossess. Multiple planes operated by Russian airlines on flights to and from Turkey changed their registration numbers last year, according to international aviation records.
The planes flying to Turkey include at least one that is owned by an Irish company that said last year that it stopped all leasing activity with Russia, in effect ordering the return of the plane. The aircraft, a Boeing 757, last flew to Turkey on Jan. 13, landing in Antalya, according to data compiled by FlightRadar24, an aircraft-tracking service.
“These planes are technically stolen,” said Yoruk Isik, the head of Bosphorus Observer, an Istanbul-based consultancy monitoring air and maritime activity, who helped verify the flight records.
Flight records show that the same planes flying to Turkey have also traveled to India, Thailand and other destinations. The flights to Turkey could draw particular international scrutiny because of its membership in the North Atlantic Treaty Organization and status as a major tourism and transit hub. Istanbul’s airport is among the busiest in Europe and a key transit point for Russians who can no longer fly directly to the continent and elsewhere in the world.
Turkish President Recep Tayyip Erdogan has sought to deepen economic ties with Russia in a bid to stabilize his country’s struggling economy, while also staking out a unique role as an intermediary among Russia, Ukraine and the West. As part of the growing economic relationship with Russia, oligarchs have been mooring yachts and parking jets in Turkey, and buying up millions of dollars in real estate there, raising alarms in Washington that Ankara is damping the impact of sanctions. Turkish officials say the sanctions are ineffective and that Turkey is playing an important role as an interlocutor with Russia.
“Turkey is testing the waters one more time,” said Mr. Isik.
Aeroflot resumed flying to Turkey in May after suspending most international flights in March following the invasion. Millions of Russians flew to Turkey last year, some as tourists and others fleeing conscription and a crackdown on dissent.
Russia’s second-largest carrier, S7, along with Azur Air, Utair and Belarus’s Belavia also flew to Turkey last year, including using U.S.-made Boeing aircraft, flight records show.
S7, Azur and Belavia didn’t respond to requests for comment. Utair couldn’t be reached for comment.
Russian emigres and tourists have been a key source of foreign currency for Turkey, which suffered a destabilizing currency crisis in late 2021. Russians represented the second largest number of tourist arrivals in Turkey from January to August last year, with more than three million Russian visitors, a 23% year-on-year increase, according to Turkish government statistics.