DT CEO ups US ambitions to double down on momentum

Deutsche Telekom CEO Tim Hoettges is looking to close the valuation gap between T-Mobile US and its rivals, as the telco revels following a very positive earnings call.

Share price in the German telco has jumped 3.9% in early morning trading following the financial results which saw revenues increase by 6.4% to €80.4 billion for 2019. Net profit was up by almost 80% to €3.9 billion, while free cash grew by 15.9% to €7 billion.

“The market environment in the European telecommunications sector is far from straightforward. Yet, despite the heavy regulation and inconsistent competitive situation, we emerged from the year just ended even stronger,” Hoettges said his letter to the shareholders.

“Not only that, but we are once again the leading European telco, based on both revenue and market value. That was and remains our overarching goal.”

Deutsche Telekom is one of the largest telcos across the world, but in recent years it is questionable as to whether it is one of the more progressive or future proofed. When looking at the penetration of full-fibre broadband or deployment of 5G infrastructure, the numbers are not as favourable, though the tide does seem to be turning.

The team now suggests 5G connectivity is being delivered in eight cities in its domestic German market, with ambitions to increase this to 20 by the end of 2020. Elsewhere, T-Mobile US launched its 5G offering in December and Austria has 31 5G base stations up-and-running.

Deutsche Telekom is heading in the right direction, but it is moving at a much slower pace than other telcos. It might want to proclaim itself as a leader in the telco arena, but realistically it is a fastish-follower at best, BT for example, has already launched 5G in 50 towns and cities across the UK.

One area where the company is proving to be incredibly aggressive is in the US, and this should continue over the coming months.

“We have the chance to become No.1 in the United States, to overtake AT&T and Verizon. That, at least, is our ambition,” Hoettges said during the earnings call.

With T-Mobile US and Sprint now looking at a clear path to the finish line, after a District Judge ruled in favour of the merger in the face of opposition from 13 Attorney Generals, the team can look further into the future. Following the merger, T-Mobile will be roughly the same size from a subscriber base as AT&T and Verizon, allowing more opportunity for the team to compete on a level playing field.

The US business is one which is once again proving to be very profitable for Deutsche Telekom.

T-Mobile US is the single largest business unit in the overarching business, accounting for just over 50% of the total revenues at €40.4 billion, a year-on-year increase of 10.7%. Momentum is clearly with the business also, the team boasted of 1.3 million branded postpaid net additions during its last financial results.

While the US is looking very positive for the telco, it will have to be careful sluggish activity in Europe does not open the door for rivals to steal market share in the various markets.

Apple takes double hit in China due to coronavirus

Gadget giant Apple has downgraded its quarterly forecast due to greater than expected supply and demand constraints caused by the coronavirus outbreak in China.

Referring to it by its official new name – COVID-19 – Apple said the outbreak has had a double negative effect on its business in China. On the supply side most (if not all) of Apple manufacturing is done in China. Massive manufacturers, such as Foxconn, have had their operations severely limited by the Chinese government as it tries to limit the spread of the disease, which means they haven’t been making stuff. These restrictions have been greater than Apple previously reckoned.

On the demand side, loads of shops have also been closed, meaning sales of iPhones, etc have apparently dropped off a cliff in China. Once more the restrictions to the retail sector seem to have been greater and more prolonged than Apple had anticipated. There were no specific numbers offered in the investor update, but Apple shares fell by 3% on the news.

“Outside of China, customer demand across our product and service categories has been strong to date and in line with our expectations,” said the update. Note there was no comment about Apple’s ability to fulfil that demand, what with Foxconn on a go-slow and all that. Apple famously likes to keep a very lean supply chain so it seems unlikely there’s much redundancy built into it.

Having said that, Apple customers are very loyal and if they have to wait a few weeks for their next fix of silicon loveliness then they probably will. So while Apple’s (and presumably their competitors’) Q1 2020 numbers may take a hit on the coronavirus disruption, they’ll probably compensate the following quarter and we’ll be back to business as usual. Which in Apple’s case means accumulating more money than it knows what to do with.

Twitter surges back after positive financial results

Three months ago the Twitter share price fell off a cliff thanks to a worrisome earnings call, but bad performance does not necessarily mean a bad company.

The latest financial report demonstrated this. Revenues for the fourth quarter of 2019 were $1.01 billion, an 11% year-on-year increase, while Average monetizable Daily Active Users (mDAU) were 152 million for Q4, compared to 126 million in the same period of 2018.

The third quarter financials could now be viewed as a blot on the landscape as share price shot up 16% during the early hours of trading on Thursday February 6. This is still considerably down on the high of $45.85 in September, but momentum might well shift back in favour of one of Silicon Valley’s earliest successes.

“We reached a new milestone in Q4 with quarterly revenue in excess of $1 billion, reflecting steady progress on revenue product and solid performance across most major geographies, with particular strength in US advertising,” said Ned Segal, Twitter CFO.

“We continue to see tremendous opportunity to get the whole world to use Twitter and provide a more personalized experience across both organic and promoted content, delivering increasing value for both consumers and advertisers.”

Despite being one of the most successful social media companies in terms of adoption, Twitter is one of the Silicon Valley residents who has struggled to make a meaningful impact on the promised fortunes of the digital economy. Over the last 12-18 months, this painful equation has seemingly been balanced, but the Q3 results threw a spanner in the works.

Over the last 12-18 months, Twitter has been sorting out its house. It started offering more comprehensive products for advertisers to target and engage customers, as well as more insightful features on the reporting features. There were some minor glitches to these features during Q3, which impacted results, as did retiring legacy products.

Another factor to consider is what actually happened during 2018. In a sentence, not a lot. This meant AmDAU’s were down during the period, and therefore advertising revenues were also. All of these factors combined resulted in the poor performance during the third quarter, but they were all issues which could be fixed. This is the basis of the turnaround during the fourth quarter.

This is the first quarter the business has exceeded $1 billion in revenue and there could be more to come. With the Olympics in Tokyo, the UEFA European Championships and the US Presidential Election all taking place over the next twelve months, there certainly could be more active users on the platform, therefore more opportunity to advertise and, finally, more revenue for Twitter.

2020 could be a very good year for the company, especially with new video products and a much more comprehensive approach to advertisers.

Fourth quarter Year-on-year Full year Year-on-year
Total revenue $1.01 billion 11% $3.46 billion 14%
Net income $118 million (54%) $1.46 billion 22%
R&D spend $198 million 40% $682 million 23%

Nokia finishes the year on a relative high

Finnish kit vendor Nokia banked a bit more profit than expected in Q4 2019, to finish a tough year on a slightly positive note.

Earnings per share were €0.15, up from €0.13 a year ago, which was apparently what was expected again this time. Nokia seemed pretty pleased with its cashflow too, having significantly topped up its flagging bank balance in the quarter. Shares experienced a minor bump, taking them near the top end of the range they have inhabited since they tanked after a gloomy outlook a quarter ago.

“Nokia’s fourth quarter 2019 results were a strong end to a challenging year. We saw strength in many parts of our business in the quarter, delivered a slightly better operating profit than the same period in 2018, generated solid free cash flow, and increased our net cash balance to EUR 1.7 billion,” said Nokia CEO Rajeev Suri.

“When I look at Nokia’s full-year 2019 performance, we saw good progress in our strategic focus areas of enterprise and software… We recognize, however, that we have faced challenges in Mobile Access and in cash generation. We will have a sharp focus on these two areas over the course of 2020, which we believe to be a year of progressive improvement as the actions we have underway start to deliver results.

“While I believe that 2020 will present its share of challenges, I am confident that we are taking the right steps to deliver progressive improvement over the course of this year and to position us for a stronger 2021.”

Suri’s words were pretty measured and indicated that it’s still mainly in recovery mode this year, so you can see why investors didn’t get too excited. 4G/5G radio market share outside of China is expected to stabilize at 27% over the course of the year and the current count of 5G deal wins is 66. Once more Nokia’s financial situation feels a bit like Ericsson’s a year or two ago, in so much as it’s all about providing a stable foundation for future growth.

Cloud becomes the golden child as Google reports yet more profit

When looking at the financial results of companies like Google, the question is not whether it has made money, but how much are the bank vaults overflowing.

Financial for the full year demonstrated slightly slowing growth, but few should worry about having to search the sofa for the pennies right now. Over the course of 2019, Google brought in $161.8 million, up 18.3% year-on-year, though it was YouTube and the Google Cloud business units as opposed to the core business which collected the plaudits from the management team.

“Revenues were 2.6 billion for the fourth quarter, up 53% year-over-year, driven by significant growth at GCP and ongoing strong growth and G Suite,” said Alphabet CFO Ruth Porat. “The growth rate of GCP was meaningfully higher than that of cloud overall. GCP growth was led by our infrastructure offerings and our data and analytics platform.”

Company Quarter Revenue (most recent) Year-on-year Growth
Google Cloud $2.6 billion 53%
Microsoft Intelligent Cloud $11.9 billion 27%
Amazon Web Services $9.9 billion 23%

Despite being a business unit which brings in an impressive $10 billion annually, it is impossible not to compare the performance of Google Cloud to AWS and Microsoft Azure. Google is realistically the only rival which can keep pace with the leading pair, though it does appear it is losing pace.

That said, the fortunes of the cloud are only beginning to be realised; this is a marathon not a sprint. Moving forward, the Google team believes strength in AI and software gives it an advantage to provide seamless experiences to users across multiple devices. There is also the blunt force approach to acquiring market share moving forward; Porat highlighted the objective is to triple the size of the cloud sales team.

Over at YouTube, the team is capitalising on the increasingly consumer appetite for video, though also what appears to be a more experimental attitude to subscription. YouTube TV is growing healthily at 2 million, while the core YouTube platform has more than 20 million music and premium paid subscribers.

This is positive momentum, though it will be interesting to see what impact partnerships have on these figures. Google is partnered with Verizon, forming a content option in its bundled products, though rivals are placing a much greater emphasis on these relationships, leaning on an already established link with the consumer, albeit sacrificing some profit in the process.

Perhaps these two business units demonstrate why Google is such an attractive company to investors and potential employees. The core business can do what it does, but Google is always searching for the next big idea. Google Cloud is arguably the most successful graduate of its ‘Moonshot Labs’ initiative, while YouTube is one of the biggest acquisition bargains at $1.65 billion in 2006. It now brings in more than $15 billion annually in ads sales.

During the earnings call, CEO Sundar Pichai pointed to some of the other investments which are absorbing the $26 billion annual R&D budget. Verily and Calico are linking together AI and cloud technologies to improve clinical trials, research, and drug development. Waymo is attempting to scale driverless vehicles in the US. Loon is another Moonshot graduate, endeavouring to stand on its own currently.

Google is one of the most interesting companies around, not only because it is a money-making machine, but the R&D business could produce some gems over the next few years.

A bad day for BT

After missing expectations for third quarter results and suggesting meeting the Huawei cap could cost £500 million, BT investors are being tested today.

With reported revenues of £17.2 billion through the first nine months of the financial year, BT is looking at a 2% deficit to make up. It has been an expensive year to date, though CEO Philip Jansen has tried to put a positive spin on events.

“BT delivered results slightly below our expectations for the third quarter of the year, but we remain on track to meet our outlook for the full year,” said Jansen.

“Underpinning the ongoing development of market-leading propositions, we continue to invest in the best converged network. We welcomed the direction of Ofcom’s recent consultation, which is an important step forward towards a widely shared ambition to invest in fibre across the whole of the UK. We’re also investing in 5G, making it available in over 50 locations, with the first customers enjoying a great experience.”

While the financials do not paint the prettiest of pictures, the last few months have seen a few sparks of good news for the telco.

The 5G rollout is progressing well, having launched in 50 towns and cities. The Ofcom Wholesale Fixed Telecoms Market Review was favourable. The on shoring of BT brand sales and service calls was completed ahead of time. The full fibre rollout has now passed 2.2 million homes. And, the Supply Chain Review has ended.

But while Jansen will want to direct investors towards the beacon of hope on the horizon, the here and now is less attractive. Thanks to regulation, competition and legacy product declines, the financials have taken a hammer blow.

“BT shares, which have been a constant underperformer over the past five years, are down by over 4% in early morning trading on the back of a third quarter trading update,” said Graham Spooner, Investment Research Analyst at The Share Centre.

“Not only have we seen a decline in revenues and adjusted earnings, as a result of the Government’s decision to give Huawei a role in the UK’s 5G network, the group has to increase its range of suppliers in the future. Despite CEO Philip Jansen being ‘really excited about the long-term prospects’, there remain challenges for him to work on in order to make BT ‘bolder, smarter and faster’.”

Looking at the Supply Chain Review, although BT is not neck-deep like Three, it does have some work to do.

While current suppliers are Nokia and Huawei for 4G, BT will have to reassess its options for the continued 5G deployment. If its 4G efforts were to be replicated, BT would certainly exceed the 35% restriction placed on Huawei RAN equipment in the network, though as the decision has been made during the early days of the 5G rollout, it is not disastrous by any means.

BT is already rolling out 5G, with Huawei equipment, and while it does have Huawei in the network core, it has already said it was searching for a new supplier prior to the Supply Chain Review. BT estimates it will cost around £500 million to replace some 4G components to ensure interoperability and get below the 35% restriction on Huawei equipment.

BT investors have had better days, but Rome wasn’t built in a day.

Wearables and services are paying off for Apple

The iPhone is still the biggest contributor to the monstrous profits Apple claws in each quarter, but efforts in wearables and services are balancing out the company.

While Apple is not a company which is going to go bust at any point in the foreseeable future, the dependence on the performance of the iPhone was leaning onto the unhealthy side. With more consumers leaning towards second-hand, refurbished devices, or extending the life of products due to the eye-watering price of new iPhones, there was a threat to profitability.

For the most recent quarter, there are no worries about the profitability of Apple, however. Total revenues for the three-month period, including Christmas sales, stood at $91.8 billion, a 9% increase from the same period in 2019. Net income set a new record of $22.2 billion, while international sales accounted for 61%.

That said, efforts over the last few years to supercharge alternative revenue streams and diversify the profit channels have certainly been paying off. The iPhone is still king at Apple, but it is evolving into a different company.

Quarter Product Revenue Software and Services Revenue Ratio
Q1 2020 79,104 12,715 86.2/13.8
Q1 2019 73,435 10,875 88.2/12.8
Q1 2018 79,768 8,471 90.4/9.6

For the purpose of continuity, we have only selected Q1 for the above comparison. This is a quarter which contains the Christmas period and therefore revenues are almost incomparable to the rest of the year.

As you can see, there is a clear trend of Apple become less reliant on hardware for revenues and profits, with the Software and Services becoming more than a bolt-on bonus for investors. $12.715 billion is an amount most companies would be happy to call group revenues for the year.

Interestingly enough, even in the ‘product’ segment, the team is becoming less reliant on the iPhone to drive revenues and profits.

Quarter iPhone Mac iPad Wearables and Home
Q1 2020 55,957 (60.9%) 7,160 (7.8%) 5,977 (6.5%) 10,010 (10.9%)
Q1 2019 51,982 (61.6%) 7,416 (8.8%) 6,729 (8%) 7,308 (8.7%)
Q1 2018 61,576 (70%) 6,895 (7.9%) 5,862 (6.6%) 5,489 (6.2%)

In short, diversification of revenues is an excellent way forward for the Apple business and demonstrative of the power of the Apple brand.

Apple is a brand which certain consumer identify with, and such is the innovation and creativity of the Apple marketing department, loyalty has been almost cult-like. Cross-selling alternative products when the consumer is so heavily invested in the brand and ecosystem is a much simpler task, this will be one of the reasons Apple’s services division is becoming so successful, but it also explains the growing wearables segment.

Wearables is a family of technologies which has struggled through the years. The first smart watch, in its current form, was released in 2011, though the segment has never really gained the traction to make it an attractive business. Apple has been persisting with its own portfolio of smart watches for years, but it does now appear to have turned a corner.

“Apple Watch had a great start to fiscal 2020, setting an all-time revenue record during the quarter,” CEO Cook said during the earnings call. “It continues to have a profound impact on our customers’ lives and it continues to further its reach as over 75% of the customers purchasing Apple Watch during the quarter were new to Apple Watch.”

Apple is no-longer simply satisfying product refreshment cycles but attracting new customers into the smart watch bonanza. The more smart watch customers there are, the more normalised the product becomes, which then compounds the success, especially with more digital natives entering their 20s and collecting bigger salaries.

Apple is a company which is defined by iPhone. This will not change, such is the success of the product and the importance of the smartphone in today’s society, but diversifying the business was always viewed as critical to expanding the profitability of the firm. Apple is doing a remarkable job of capturing new revenues.

Intel sets new record with $72bn 2019 revenues

Chip giant Intel has set a new record for full-year revenues, collecting $72 billion across the course of 2019.

For the final three months of the year, Intel brought in revenues of $20.2 billion, an increase of 8% year-on-year, while sales for the 12 months can in at $72 billion, a 2% increase compared to 2018. Net income remained flat for the year at $21 billion.

“In 2019, we gained share in an expanded addressable market that demands more performance to process, move and store data,” said CEO Bob Swan.

“One year into our long-term financial plan, we have outperformed our revenue and EPS expectations. Looking ahead, we are investing to win the technology inflections of the future, play a bigger role in the success of our customers and increase shareholder returns.”

Although Intel has faced its difficulties over the last few years, it seems shareholders are very pleased with performance, a month into Swan’s tenure. Share price has jumped 19% over the course of the last six months, including a 5.5% increase in overnight trading since the results have been announced.

Looking at the individual business units, the Data Centre Group revenues increased to $23.5 billion across the year, up 2%. The IOT business unit brought in $3.8 billion, up 11% compared to 2019. The PC-centric business increased revenues 2% in the final quarter, but performance was flat across the year bringing in $37.1 billion.

Under intense competition from the likes of Advanced Micro Devices though it appears enthusiasm for product launches at CES earlier this month have been backed up on the spreadsheets.

Ericsson shares drop on disappointing North America numbers

Sales at kit vendor Ericsson barely grew in Q4 2019, with most of the blame being pinned on the protracted merger of T-Mobile US and Sprint.

When adjusted for adjustments total sales increased just 1% year-on-year, thanks to a 9% decline in North America. As you can see from the tables below, Ericsson had plenty of growth earlier in the year in North America, so this is a fairly significant reversal of fortunes. Ericsson would like us to believe it was an aberration brought about by the uncertainty surrounding the TMUS/Sprint merger, but that’s been going for a while so it’s not obvious why it would suddenly have such a profound effect.

“Due to the uncertainty related to an announced operator merger, we saw a slowdown in our North American business in Q4, resulting in North America having the lowest share of total sales for some time,” said Ericsson CEO Börje Ekholm. “However, the underlying business fundamentals in North America remain strong.

“Operating income was impacted by increased operating expenses. The increase is related to the Kathrein business acquisition, increased investments in digitalization and added resources to strengthen security as well as our Ethics and Compliance program. For 2020 we expect somewhat higher operating expenses, which will not jeopardize our financial targets.”

It looks like investors didn’t totally buy the North America narrative either, with Ericsson’s shares down around 8% at time of writing. Ekholm spoke at length about how important it is to continue to build for the long term and not sacrifice that for short-term gains. That’s fine, but many more quarters like this and even that strategy will be called into question.

Micron expects up-tick after Huawei licence application win

US semiconductor firm Micron Technologies has said it expects a greatly improved 2020 after US authorities granted the firm a licence to trade with its largest customer, Huawei.

Although Micron was not one of the worst impacted firms following the decision from the Government to ban any US company from working with Huawei, the firm’s earnings call in September showed the damage. Revenues for the final reporting quarter of 2019 stood at $4.87 billion, down 43% from the previous year. Being unable to trade with Huawei was a major contributor to this downturn.

During the September earnings call, CEO Sanjay Mehrotra said the situation might get worse, though with the new licences being granted, the team is optimistic once again.

“As previously disclosed, we are continuing to ship some products to Huawei that are not subject to Export Administration Regulations and Entity List restrictions,” Mehrotra said this week.

“We applied for, and recently received, all requested licenses that enable us to provide support for these products, as well as qualify new products for Huawei’s mobile and server businesses.

“Additionally, these licenses allow us to ship previously restricted products that we manufacture in the United States, which represent a very small portion of our sales. However, there are still some products outside of the mobile and server markets that we are unable to sell to Huawei.”

This is major news for Micron. Across the financial period for 2019, sales to Huawei accounted for 12% of total revenues. There are firms who are significantly more dependent on Huawei as a customer, though any accountant will tell you that losing a customer worth 12% of total revenues is a devasting impact to the spreadsheets.

Looking at the financials for the latest earnings call, total revenues stood at $5.1 billion, up 6% sequentially, but down 35% in comparison to the same period of 2019. This is unsurprising considering the situation, though it will get better. Lost revenues will not be recovered immediately, new products need to be qualified with Huawei’s mobile and server businesses prior to contributing to revenue, but that is the only dampener here.

The next three months are traditionally the weakest for Micron throughout the year, though CFO David Zinsner expects recovery to begin in the third quarter of 2020. This is when the renewed relationship with Huawei will start to show on the spreadsheets.

Although the trade conflict between the US and China is still raging on, Micron will be hoping this will be the end of the collateral damage impacted by the US Government. Theoretically, this nightmare is in the rear-view mirror for Micron.