Telecom Italia wrestles with Europe’s biggest COVID-19 dent

Telecom Italia (TIM) has released its latest financial results, revealing painful battle scars as European nations continue to fight the coronavirus pandemic.

While it should come as little surprise when you look at which countries were most severely impacted by COVID-19, the figures have confirmed it. Telecom Italia is still profitable, which is often forgotten when companies miss expectations, but the impact of the coronavirus pandemic has been very notable.

Total revenues for the three-month period to March 31 stood at €3.9 billion, down 11.3% year-on-year, while profits declined 10.8% year-on-year to €1.7 billion.

Financial results for European telcos through to March 31 (Euro (€), thousands)
Telco Revenue Year-on-year Profit Year-on-year
BT (£) 5,632 -4% 2,007 -2%
Telecom Italia 3,964 -11.3% 1,735 -10.8%
Orange 10,394 1% 2,602 0.5%
Telefonica 11,366 -5.1% 3,760 -11.8%
DT 19,943 2.3% 6,940 7.4%

Although it does look like business as usual at Deutsche Telekom, let’s not forget that as well as the country effectively combatting the coronavirus, the Group also contains T-Mobile US, which has been flying over the last few years. Total revenues in the US grew 0.3% to $11.1 billion over the quarter, while profits shot up 11.6% year-on-year to $3.6 billion.

What is worth noting is that it is not all bad news at Telecom Italia. This is a company which is under extraordinary pressure because of a truly unforeseeable event, but previous initiatives to create a healthier and more sustainable business are seemingly working. Improvement in cash generation (14% year-on-year increase) and debt reduction (down €923 million) have continued through the three-month period thanks to strategic initiatives launched in 2019. The underlying business model and strategy is still theoretically sound.

One of these projects, the network sharing agreement with INWIT and Vodafone, and subsequent sale of a stake in the towers joint venture, contributed €650 million to the debt reduction mission. Negotiations with KKR, for the sale of a minority share of the secondary fibre network, are continuing which will also reduce debt. It is not necessarily perfect scenario to be offloading assets, but needs must occasionally when pressure mounts on the spreadsheets.

It might be tempting to look at the surface figures, but it is always important to remember that COVID-19 is creating trading conditions no-one could foresee. TIM is still a business which is under threat from a highly competitive landscape in Italy, but the reaction from the team still looks competent.

Looking at the non-financial performance data, TIM Vision, the content platform saw a 20% increase in active users across the period, though mobile subscriptions dropped 579,000 year-on-year. IOT connections slightly compensated, but not enough. In fixed broadband, net customer losses across both consumer and wholesale totalled 233,000. It is clear the business is still adjusting to the new market dynamic with Iliad on the scene.

Segment Subscriptions Year-on-year
TIM Vision (TV) 1.85 million 21%
Mobile 20.42 million -2.8%
Fixed (retail) 8.98 million -1.5%
Fixed (wholesale) 8.01 million -0.6%

Twitter plunges to loss thanks to weakened online ad demand

Twitter has been on the rise over the last few years, but the coronavirus pandemic has slammed the brakes on its progress.

While some of its neighbours have been sailing through the coronavirus turbulence, Microsoft or Google for example, Twitter is one Silicon Valley resident which is wearing some very visible bruises.

“In this difficult time, Twitter’s purpose is proving more vital than ever. We are helping the world stay informed and providing a unique way for people to come together to help or simply entertain and remind one another of our connections. We’ve delivered our strongest ever year over year MDAU growth.”

Twitter quarterly results 2018-20 (USD ($), millions)
Period Total revenue Operating income
Q1 2020 808 (7)
Q4 2019 1,007 153
Q3 2019 824 44
Q2 2019 841 110
Q1 2019 787 94
Q4 2018 909 207
Q3 2018 650 92
Q2 2018 711 96
Q1 2018 575 75

Source: Twitter Investor Relations

Although engagement has been increasing, Monetizable Daily Active Users (MDAU) were up 24% year-on-year, this was not reflected in the advertising revenues. The team has suggesting the period begun strongly, however from March onwards, when societal lockdowns were introduced, advertising demand shrunk.

This does put an end to a promising streak of financial results, which suggested Twitter was on course to join Silicon Valley’s big leagues.

While Twitter could be recognised as one of the founding fathers of the Silicon Valley fraternity, its financial performance has not lived up to the reputation. Users were never a problem, though engaging advertisers and creating a platform which offers ROI was. This equation was seemingly solved in recent years, with the introduction of new products and reporting features, though it seems to have reared its head once again.

When you compare Twitter’s current woes with the on-going success at Facebook and Google, perhaps advertisers are strategically placing resources with preferred platforms. In other words, as marketers see budgets trimmed in the face of a global recession, Twitter activity is being scaled back in favour of Facebook and Google.

We’ve said this before, but one bad earnings call does not make Twitter a bad company. Last October, Twitter share price tanked 18% as it failed to meet analyst expectations, but three months later it soared 15% after the financial statements were released.

The company is going through a tough period right now, but so are millions of other companies. This is a unique period in living memory and Twitter will play a very important role as the world recovers, especially with a Presential Election campaign on the horizon.

Nokia rolls with the COVID-19 punches in Q1 2020

Finnish kit vendor Nokia managed a solid set of numbers in the first quarter of this year, despite supply hassle created by that most disruptive of viruses.

Revenues were down a little bit, year-on-year, but they would have been slightly in the black if not for €200 million worth of supply disruption causes by that goddamn coronavirus. On the other hand the operating loss was significantly reduced from €524 million a year ago to €76 in the most recent quarter, indicating the cost reduction programme is going more or less according to plan.

“Nokia’s solid first quarter results showed broad year-on-year profitability improvements as our transformation and product cost reduction efforts started to take hold,” said CEO Rajeev Suri in his prepared commentary. “On a year-on-year basis, group-level non-IFRS operating margin was up by 3.6 percentage points; Networks gross margin increased by 3.5 percentage points; Nokia Software had an excellent quarter with sharp margin improvements and strong momentum with customers in North America; and, Nokia Enterprise delivered double-digit sales growth.

“These improvements are, of course, coming at a time of unprecedented change, given the impact of COVID-19. Our top focus areas are protecting our employees, maintaining critical network infrastructure for customers, and ensuring we have a strong cash position. In Q1, we saw a top line impact from COVID-19 issues of approximately €200 million, largely the result of supply issues associated with disruptions in China.

“We are adjusting the mid-points within our previously disclosed Outlook ranges for full-year 2020 to reflect the increased risks and uncertainty presented by the ongoing COVID-19 situation. We expect the majority of this COVID-19 impact to be in Q2 and believe that our industry is fairly resilient to the crisis, although not immune.

“We did not see a decline in demand in the first quarter. As the COVID-19 situation develops, however, an increase in supply and delivery challenges in a number of countries is possible and some customers may reassess their spending plans. Pleasingly, despite the majority of our R&D employees working from home, we have not seen any impact on our roadmaps, and, in fact, some key software releases are proceeding ahead of schedule. Additionally, we saw a massive increase in network capacity demands.”

You can see selected slides from the Nokia presentation below. Note the 29% decline in Greater China sales, which seems to be offset by improved fortunes in the Middle East and Africa. Nokia seems to have been totally excluded from the Chinese market when it comes to the 5G RAN build-out, but its core and fixed line fortunes in the region remain unclear. Investors seemed happy enough with the numbers on the whole, with Nokia’s shares up 4% at time of writing.

Microsoft gets a bump-up in numbers thanks to COVID-19

The coronavirus outbreak is causing chaos in the financial markets, but with every crisis there are those who will benefit financially; Microsoft appears to be one.

The Redmond-based internet giant has reported its latest quarterly results, and it appears the lockdown is becoming a catalyst for profits. Total revenues increased 15% over the three-month period ending March 31, operating income was up 25% to $13 billion and net income jumped 22% to $10.8 billion.

With share price growing 4.5% in the final hours of trading, and a further 2.6% during the pre-market hours, Microsoft’s market capitalisation is more than $1.35 trillion, making it the most valuable corporation worldwide.

“We’ve seen two years’ worth of digital transformation in two months,” said Microsoft CEO Satya Nadella.

“From remote teamwork and learning, to sales and customer service, to critical cloud infrastructure and security – we are working alongside customers every day to help them adapt and stay open for business in a world of remote everything.”

The coronavirus pandemic has forced families behind closed doors and employees to work from home. With lockdowns still in place in many of the worlds developed markets, new norms are bedding in and Microsoft is certainly one of those companies who will benefit.

Breakdown of Microsoft financial performance by business unit
Business unit Revenues Year-on-year
Productivity and Business Processes $11.7 billion 15%
Intelligent Cloud $12.3 billion 27%
More Personal Computing $11 billion 3%

Source: Microsoft Investor Relations

With more people working remotely, more businesses are being forced through a digital transformation process, and much more aggressively than most would have liked. To enable efficient work process, more cloud resources will have to be consumed by enterprise customers, though it is likely additional products will also be taken on in areas such as security.

For a company which has pivoted over the course of the last decade to position cloud front and centre of the business, current trends are incredibly beneficial.

For Microsoft, the revenues for the Azure cloud computing products surged 59% over the three months, while Teams now has more than 75 million daily active users, tripling over the last two months. 20 organizations with more than 100,000 employees are now using Teams, with new features being introduced each week. Live events for up to 100,000 attendees can now be streamed across the platform. Office 365 now has 258 million paid seats, while usage of Windows virtual desktop tripled this quarter.

But it is not just the enterprise-focused business units who are profiting.

Microsoft 365 Personal and Family now has more than 39 million subscribers, while Teams has been opened to consumer users for the first time. Windows 10 now has more than 1 billion monthly active devices, up 30% year-over-year, and Xbox has seen a boost also.

With children not being allowed to play outside in the garden and adults not allowed to play inside pubs, an obvious beneficiary was going to be the online entertainment segment. Netflix has already demonstrated financial gain with 27% uplift in revenues and a 22% boost in subscribers during its own earnings call, and Xbox has seen a similar lift.

Xbox Live currently has 19 million active users, while the Xbox Game Pass has more than 10 million subscribers. Although the team did not offer specifics when it came to the cloud gaming venture, Nadella said Project xCloud has “hundreds of thousands of users” in the beta stages in seven markets, with eight more launching over the next few weeks.

One question which does remain is whether this boost in revenues will be sustained?

“In our consumer business, we expect continued demand across Windows OEM, Surface and Gaming from the shift to remote work, play and learn from home,” said Microsoft CFO Amy Hood. “Our outlook assumes this benefit remains through much of Q4, though growth rates may be impacted as stay-at-home guidelines ease.

“In our commercial business, our strong position in durable growth markets means we expect consistent execution on a large annuity base, with continued usage and consumption growth across our cloud offerings.”

The risk of this benefit is that everything returns to the pre-COVID-19 way of life. Offices gradually become re-populated and the lessons from remote working are forgotten by traditional organisations. This would mean the bump in revenues would not be sustained by the cloud companies.

Although we suspect some traditional organisations might return to pre-COVID-19 working practises, many will adopt at least a portion of the newly transformed way of life. The extremity of the current bounty for the cloud companies will not be sustained, but there should be a shift in mentality over the long-term.

We tend to agree with the cloud companies that this enforced digital transformation programme will bed-in, though perhaps not as enthusiastically as the cloud companies believe. These are salespeople let’s not forget, selling the potential of Microsoft to investors. There will be sustained benefits, but some in society will be intolerant of evolution, so will returns to the ways of old.

Netflix reports surge in subscriptions and revenues thanks to COVID-19

As expected, Netflix has experienced a material benefit from many societies being placed under lockdown thanks to the on-going coronavirus pandemic.

Revenues for the three months ending March 31 stood at $5.768 billion, a 27% year-on-year increase for the quarter, while the number of subscriptions globally was up 22.8% to 182 million. With many societies forcing citizens to stay at home for the vast majority of the day, it is unsurprising Netflix is benefitting from the current situation.

Interestingly enough, Netflix also spent far less over this three-month period on marketing activities than it had before, year-on-year 18% less in fact, though any gains here were partly offset by the additional $81 million which was allocated to technology and development.

“At Netflix, we’re acutely aware that we are fortunate to have a service that is even more meaningful to people confined at home, and which we can operate remotely with minimal disruption in the short to medium term,” Netflix said in the letter to shareholders. “Like other home entertainment services, we’re seeing temporarily higher viewing and increased membership growth.

“In our case, this is offset by a sharply stronger US dollar, depressing our international revenue, resulting in revenue-as-forecast. We expect viewing to decline and membership growth to decelerate as home confinement ends, which we hope is soon.”

The issue which Netflix faces in the long-term is one of production, though this is a challenge which the entire segment is coming to terms with. All filming has effectively stopped globally, and while Netflix will have content ready to launch over the coming months, the severity of the impact to new content launches will depend on how quickly normality can return to society.

This is a risk for the industry, but it is one which can be managed to a degree. Writing can still continue, as can production of animated content, though there will certainly be an impact. However, this should be balanced by the gains which Netflix is seeing through this period of societal lock-down.

“A surge in subs is notable which will have a positive impact on revenue over subsequent quarters,” said Paolo Pescatore of PP Foresight. “Unsurprisingly, engagement is going through the roof and will proliferate over coming months.

“You should expect to see users think twice about how much they spend with their current TV provider and may cut back/substitute in preference for online video streaming services. For now the future of SVOD remains rosy.”

Ericsson celebrates telecoms industry resilience after a solid Q1

Swedish kit vendor Ericsson delivered Q1 2020 numbers broadly in line with expectations and was cautiously positive about how the telecoms industry is handling the coronavirus crisis.

Revenues of SEK 49.8 billion (~$5 billion) represented a 2% decline when adjusted for adjustments, but that seems fine with investors, who had boosted Ericsson shares by 5% at time of writing. Regarding the pandemic, the official line is that it has had ‘limited’ impact on business, but has definitely created greater uncertainty for Q2. Despite that Ericsson is sticking with its previous outlook.

“Ericsson delivered a solid result during the first quarter, with limited impact from the Covid-19 pandemic,” said Ericsson CEO Börje Ekholm. “We expect our industry to show resilience throughout the pandemic and we are well positioned with a competitive 5G product offering and cost structure. There is near-term uncertainty around sales volumes due to Covid-19 and the macroeconomic situation, but with current visibility we have no reason to change our financial targets for 2020 and 2022.

“For 2020 we estimate the RAN market to grow by 4%, however for Q2 we expect somewhat lower than normal sequential sales growth as there are uncertainties impacting short-term growth negatively. Covid-19 and actions taken by governments to slow down the spread are making our service delivery and supply harder due to lockdowns and travel restrictions in many countries. In addition, while we have seen no material effects so far on our demand situation, it is prudent to believe that the slowdown in the general economy may lead some operators to delay investment programs.

“We are determined to come out of the Covid-19 situation in a stronger competitive position and our investments in R&D is a strategic cornerstone which we will not sacrifice. We also continue investments in digital transformation which is expected to generate competitive advantages.

“The current global uncertainty requires a humble attitude towards predicting the near-term future. We remain positive on the longer-term outlook, but the second quarter is likely to be a tad softer than normal due to timing of strategic contracts and uncertainty induced by Covid-19.”

We spoke to Ericsson Head of Networks Fredrik Jejdling and he largely echoed Ekholm’s sentiments. He flagged up the China Mobile wins and the completion of the TMUS/Sprint merger as specific positives, but cautioned that delayed spectrum auctions could have a negative effect in the industry. Jejdling was keen to stress the strategic aim of emerging in a stronger competitive position and the consequent need for Ericsson not to over-react to the crisis.

In that respect Ericsson seems to be adopting a similar strategy to Sweden in general, which has been relatively laissez faire when it comes to shutting itself down. Now that the dust has settled on the first phase of the pandemic, and catastrophe seems to have been averted, it’s sensible for companies and governments alike to start thinking about cautiously opening up once more.

Here are some slides from the earnings presentation.

Huawei insists everything’s fine after revenue growth slows dramatically

Chinese telecoms vendor Huawei just about managed to grow its revenues in Q1 2020 in the face of mounting challenges.

Huawei’s quarterly announcements tend to be pretty minimal, since it’s not a public company and thus doesn’t have to publish any of its numbers if it doesn’t feel like it. All we got this time was CNY182.2 billion ~$27 billion) in revenue, which was an increase of 1.4% year-on-year, and a net profit margin of 7.3%. “Huawei’s business is continuing as usual and its overall business results in Q1 2020 are in line with expectations,” said the announcement.

Assuming these numbers are legit, independently audited, etc, it seems like a decent effort to keep growing after a quarter in which the coronavirus pandemic affected China first and most severely. On the other hand, Huawei managed to grow its revenues by 19% last year, so this represents a dramatic slowdown and points towards negative growth next quarter.

Because Huawei didn’t fancy even breaking down the numbers by business group, we don’t know which of business or consumer spend was more responsible for the slowdown at Huawei. The chances are the split was fairly even since the whole world has slowed down too. One silver lining for Huawei is that the US is too distracted by the crisis to impose more punishments on it. But considering the daily deterioration of relations between the US and China, it’s surely just a matter of time before they resume.

Huawei spent the rest of its announcement banging on about what a great job it’s doing with helping the world deal with the crisis. Since the outbreak, Huawei and its partners have rapidly launched many 5G- and AI-powered medical applications,” said the press release. “We are using our expertise in communications technologies to help fight the pandemic and save more lives… In addition, Huawei has been doing its best to get masks, test kits, and other protective supplies to the countries and organizations that need them.”

The earnings announcement signed off on a philosophical note. “A seed that survives the storm will sprout and then blossom,” it mused. “Even though it is impossible to know when the tides of this pandemic will turn, we at Huawei believe that this challenge will be overcome by standing together.” Fine sentiments but global geopolitical trends would suggest it’s a forlorn hope.

Twitter withdraws guidance for next month’s earnings call

With the FTSE 100 down 30% and the Dow Jones declining 31% in a month, it would surprise few there are numerous companies preparing investors for a tricky earnings call.

Twitter has its first quarter earnings call in just over a month and in preparation for what should be a difficult conversation, the team has taken the opportunity to withdraw revenue guidance. Engagement is growing to the levels it would have expected, monetizable Daily Active Users are up 8% quarter-on-quarter, though a decline in advertising revenues is likely to be a painful reality.

Year-on-year revenue is likely to decline, while team has warned it is likely to report an operating loss for the period.

“Twitter had a strong start to the year before the effects of COVID-19 began spreading more broadly, including a successful Super Bowl and overall strength in the US,” said CFO Ned Segal.

“The COVID-19 impact began in Asia, and as it unfolded into a global pandemic, it has impacted Twitter’s advertising revenue globally more significantly in the last few weeks. We have made solid progress on our consumer and revenue product priorities and we remain confident in our opportunity and strategy.”

This is of course a very tricky period for any advertising-led company to navigate, though the Twitter team might take some comfort in realising it is not alone in the technology space.

At the end of February, Microsoft warned investors its revenues would not be as high as forecast in the previous earnings call, while PayPal suggested to its investors COVID-19 would have a negative impact on its performance.

Although the new kids in Silicon Valley might be feeling the pinch, it is the older residents, the semiconductor companies, who seem to be impact more significantly thanks to lower devices sales. Qorvo, a supplier to lower-cost iPhones Apple was rumoured to be launching this spring, lowered its revenue forecast from $840 million to $770 million, while ON Semiconductor’s revenue guidance fell to of $1.275 billion to $1.325 billion from $1.355 billion to $1.405 billion. Qualcomm recently announced results and a lower than expected guidance, while Broadcom has withdrawn prior annual guidance.

These statements might have been expected from the market considering the on-going challenges presented by COVID-19, but for Twitter this is a precarious period in particular.

Twitter is facing pressure like few other companies, and it comes in the shape of a vulture more commonly known as Elliott Management.

Like any vulture fund, Elliott Management aims to capitalise on difficult conditions to make money. It scours the globe searching for companies where share price is lower than expected, and it may believe it can sway other investors into a change of strategy and/or management. When it purchased 4% of Twitters shares over the last few months, share price was in region of $33-38, which was deemed undervalued. With Twitter’s share price now down at $25 (at the time of writing) it might sense an opportunity.

Twitter attempted to appease the activist investor by appointing one of its partners, Jesse Cohn, to the Board of Directors, but this new context might offer some encouragement to Elliott Management to pursue a more aggressive path.