Fitbit financials tumble but that might not worry Google

Fitbit might not be the profit bonanza it once was, but with sales increasing it offers Google another interface to collect data and launch new services.

Although the financial results do not seem the most attractive at first glance, it is always worth remembering what the new objective of this business is likely to be. Google acquired Fitbit in November, and while the Mountain View residents never say no to money, there is a bigger picture.

Fitbit is most likely about exposure, increasing the number of Google interfaces in society and offering more opportunity for the internet giant to create services. This is where Google’s expertise lies, in software not hardware, but it does occasionally need to encourage the development and adoption of supporting ecosystems to realise its own goals. If more smart devices are being worn by consumers, the greater the opportunity for Google to make money.

“In 2019, we continued to advance our mission of making health accessible to more people around the world by delivering devices, software and services at affordable prices that help improve peoples’ health,” said CEO James Park.

“As a result, we sold 16 million devices and our smartwatch business grew 45% at retail, due to strong demand for Versa 2. Our community of active users increased to nearly 30 million, and Fitbit Health Solutions grew 17%, underscoring the strength of the Fitbit brand.”

2019 2018 Change
Total Revenue 1,434.8 1,512 (5%)
Net Income (120.8) (320.7) (264%)
Devices Sold 16 13.9 15%
Monthly Active Users (MAUs) 29.6 27.6 7%

Figures in millions (US$)

The full year financial measurements are clearly not heading in the right direction, though part of this can be attributed to the average selling price of the devices decreasing 17% to $87. This trend is thanks to the decision to introduce more accessible and affordable devices, increase the range of devices and various promotions or offers.

Perhaps the most important statistic to note here is the number of devices sold over the period. This is up 15% on 2018, while 61% of sales came from completely new customers. For the repeat customers, 54% came from customers who were inactive during a prior period meaning Fitbit is re-engaging those it might have lost as well.

Google might have spent $2.1 billion to acquire the Fitbit business, but it was highly unlikely going to be driven by the direct revenues it would achieve. $1.434 billion is nothing to turn you nose up at, but it is a drop in the ocean if Google can scale wearable devices in the same way it has done to smart speakers.

Prior to the entry of Google and Amazon, the smart speaker segment was sluggish. Adoption was almost non-existent, and interest was even lower. But in introducing their own, more affordable, devices and very cash-intensive advertising campaigns, these two internet giants drove up engagement and sales, whilst also forcing competitors to create their own products.

Looking at the final quarter of 2019, Strategy Analytics estimates that 55 million devices were sold globally, with Google collecting a 24.9% market share. Others are catching-up, but that won’t bother Google.

The more smart devices which are in the world, the more opportunity there is for Google to own the platform which services are build on and through. Android extends the Google influence into the smartphone world, the smart speaker gives it a voice interface in multiple rooms in the home and Wear OS is a version of Google’s Android operating system designed for smartwatches and other wearables.

From here on forward, pay a bit of attention to the financials of Fitbit, but be more interested in the number of devices which are being sold and the number of customers who are signing up to not only Fitbit’s health monitoring services, but also Google’s. This is a new data treasure trove for Google and a further opportunity to monetize digital lifestyles through a new interface.

Amazon and Microsoft are proving to be a different class in the cloud game

Amazon and Microsoft have unveiled bumper financial results and now it is over to Google to prove it can keep pace with the two clear leaders in the cloud segment.

For years, it was Amazon’s cloud business unit, AWS, which was incomparable to the rest of the cloud segment. No-one could get anywhere near this trailblazer, though Microsoft has closed that gap recently. The question is whether anyone else has? The likes of Google, IBM and Oracle claim to be in the same league, but there is little evidence to support this, but Google has a chance to set the record straight next week.

Amazon and Microsoft have now revealed their numbers for the final three-month period of 2019. The story is not quite complete without Google’s numbers, realistically the only competitor who has a credible claim to be in the same league, but the numbers are eye-watering.

At group level, Amazon increased revenues by 21% during the last quarter, with the cloud business bringing in $9.9 billion, an increase of 23% year-on-year. While net income only increased 19% to $2.6 billion, this was actually 79% of the total net income across the group. The cloud business unit at AWS is a profit machine.

Over at Microsoft, group revenues increased by 14% to $36.9 billion, while net income was up 38% to $11.6 billion. Revenue in the ‘Intelligent Cloud’ unit increased 27% to $11.9 billion with Azure’s revenue up 62% for the quarter. Cloud products and services of course factor into the other Microsoft business units, but the ‘Intelligent Cloud’ group is showing the most aggressive growth.

Business unit Total revenue Growth
Intelligent Cloud $11.9 billion 27%
Productivity and Business Processes $11.8 billion 17%
More Personal Computing $13.2 billion 2%

Although revenues are only one part of the picture, market share estimates also tell another story.

Looking at the most recent estimates from Synergy Research Group, Amazon is leading the cloud segment with 39%, Microsoft sits in second with 19%, Google is on 9% and 5% for Alibaba. Salesforce now has 4% and IBM is on 3%, while no-one else has more than a 2% share. These figures are for the Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) segments.

As mentioned before, the landscape is not complete until Google releases its numbers next week, though IBM and Salesforce have released theirs. At IBM, total cloud revenues stood at $6.8 billion, up 21% year-on-year, while Salesforce reported group revenues of $4.5 billion for the last quarter, an increase of 33%. These numbers are attractive, investors might well be pleased, but Microsoft and Amazon look like they are sitting alone in the top tier of the cloud industry.

Another factor to consider are the deal wins.

While Amazon has been hoovering up deals with SMEs and the emerging digital businesses, Microsoft has extensive existing relationships with almost every major corporation in the Western world. The firm claims to currently be working with 95 of the Fortune 100 companies on cloud infrastructure. These companies like the look of Microsoft, thanks to a stronger focus on hybrid-cloud, whereas Amazon has a better reputation for the speed and scale of cloud-only strategies.

During the last period, Microsoft secured the US Department of Defense $10 billion JEDI cloud contract, which will cover 1,700 data centres and the transition of millions of devices from on-premise servers to the cloud. AWS lost out on this deal, but it has got plenty of significant customer wins to boast of; Western Union, media firm Fox, the NFL, pharmaceutical giant Novartis and Best Western Hotels & Resorts.

Interestingly enough, the rapid expansion of these internet giants might well start to encroach potential revenues which have been earmarked for the telcos.

The last few months have not only seen CAPEX investment from the likes of AWS and Microsoft, but also picking up industry executives. An excellent example of this is Alex Clauberg, a former Deutsche Telekom executive.

As the connected world starts to spread to more corners of society and the ‘edge’ develops, there are plenty of opportunities for telcos to make more money from what is quickly becoming a commoditised service. However, there is no guarantee the newly created ‘service’ revenues will be reserved for the telcos themselves. Clauberg’s move is evidence the internet players are attempting to muscle in on telco revenues.

Clauberg is a well-known name in the SDN and NFV sector and is the current Chairman of the Telecom Infra Project (TIP). He was previously VP and CTO at T-Systems International, the global services and consulting arm of DT, but now works as Solutions Architects Leader, at AWS. There is not a huge amount of information as to what this new job actually is, but it is demonstrative of the ambitions of the likes of AWS in the telco world.

These are companies which are growing rapidly in their traditional playing grounds and pushing aggressively to steal profits in places they should be considered secondary. Google still has an opportunity to place itself at the top table of the profitable cloud segment, but it does look like AWS and Microsoft are in a league of their own.

ZTE gains confidence on the back of solid earnings growth

Perhaps ZTE has just been enjoying an uncomfortable silence and an expensive milkshake in recent months, but its financials for the first half of 2019 are screaming for attention.

It is quite difficult to measure the performance of the business looking at the financials alone, ZTE found itself in the Trump crosshairs in H1 2018, though the team is hyping itself up now, seemingly to gain attention in a very noisy segment. ZTE is often overlooked when considering the major network infrastructure vendors, but it certainly does warrant mention.

Revenues for the first half of 2019 stood at roughly $6.23 billion, up 13.1% year-on-year, profits increased a massive 118% to $210 million. The team is now forecasting profits between $530-640 million for the first nine months of the year.

These numbers might sound very impressive, but it was at this point last year when President Trump and his administration targeted ZTE. In May 2018, ZTE announced its major operating activities had ceased after the US Department of Commerce’s Bureau of Industry and Security (BIS) placed an export ban on the vendor. Without the US complement in the ZTE supply chain, the firm was almost extinct, though concessions were made and now it appears it is business as usual.

This is why the year-on-year gains are largely irrelevant. ZTE was a shell of a company at this point last year, fighting for its very survival.

That said, the company is surging towards the 5G finish line just like its rivals, and now it needs to convince potential customers it is a stable, reliable and innovative partner. Being selected to supply equipment to any telco will be after intense scrutiny, and thus the charm offensive has begun.

First of all, lets start with the R&D spend. ZTE has suggested it has spent roughly $900 million on R&D for the first six months of 2019, a 14.5% ratio of the total revenues for the period. This is an increase from the 12.8% share of the same period of 2018, with the new figure just ahead of the 13.8% share of revenues (estimate) Huawei allocated to R&D last year. The domestic rival has promised to increase this figure by 15-20% for 2019, though the overall percentage will not be known until the full year financial figures are known.

In comparison, Ericsson said it attributed 18.5% of net sales revenue to R&D over the course of 2018, a figure which increased to 18.7% by the end of the first six months of 2019. At Nokia, 18.4% of net sales revenues were directed towards the R&D department for the first six months of this year.

This part of the business has largely been focusing on the development of basic operating systems, distributed databases and core chipsets most recently. The company has completed the design and mass production of the 7nm chipsets, while it is currently undergoing the R&D phase for 5nm chipsets.

All this work has resulted in 3,700 5G patents being granted to the firm, though this number might notably increase in the near future. ZTE has also said it is partnering with various Chinese universities to source 5,000 new employees to bolster the R&D ranks. Once again, these are numbers which are being cast into the public domain to enhance the reputation of the business at a time where vendors are facing scrutiny at an unprecedented level.

Of course, when we are talking about creating a perception of stability and reliability, as well as increased scrutiny, you have to discuss security.

ZTE might have managed to avoid US aggression over the last couple of months, Huawei has been the primary target, but as a partly state-owned entity, such questions will never be that far away. This is where the cybersecurity centres will play an important role.

Opened in Nanjing, Rome and Brussels, the cybersecurity centres will allow potential customers to test and validate the security credentials of the firm prior to installing any equipment or software in the network. Some will not be convinced this is a fool-proof way to ensure resilience, though it is an act of transparency which the industry and governments have been crying out for.

The result of this work is 60 memorandums of understanding (MoU) with telcos around the world, 50 5G demonstrations in 20 industry verticals, 300 strategic collaborations and 200 5G products to date.

It is often easy to overlook ZTE and designate the firm as a poor man’s version of 5G network infrastructure, but the numbers justify inclusion at the top table. The challenge which ZTE now faces it making prominent strides into Western markets, the very ones which are getting twitchy over security and price today.

Cisco hits expectations once again, but disappoints on forecast

Cisco has released financials for the final three-month period of 2018, beating market expectations for the 21st consecutive quarter.

He might not be the most flamboyant of CEOs, but like Satya Nadella over at Microsoft, Chuck Robbins is letting the business do the talking. Since his appointment in 2015, the vendor has gone from strength-to-strength, with these results adding another feather to the cap.

Looking at the financials, total revenue for the three months reached $13.4 billion a 5% year-on-year increase, while net income was down 42% to $2.2 billion. Although the latter figure might shock some, CFO Kelly Kramer has suggested this is only a blip on the radar, with the hole attributable to US Treasury Regulations issued during the quarter relating to the Tax Cuts and Jobs Act.

In terms of the numbers across the year, total revenues stood at $51.7 billion, up 7%, while net income was $13.8 billion, an increase of 9% compared to the previous year.

However, it is not all glimmering news.

“Let me reiterate our guidance for the first quarter of fiscal ’20,” Kramer said during the earnings call. “We expect revenue growth in the range of 0% to 2% year over year.”

Considering the ambitious plans set-forward by the business over the last few years, this would not seem to be the most generous of forecasts. The dampened forecast might well disappoint a few investors. What is worth noting, it that despite having strong and stable foundations, Cisco is not immune to global trends.

Looking at the telco customers, Asia is demonstrating weakening demand for Cisco. The China telco business is weakening, while demand in India has dropped off as aggressive network roll-outs in 2018 are not being replicated today.

In terms of working with enterprise customers, the team had two major software deals in 2018 which are “tough to compare against”, according to Robbins, while the Chinese and UK markets are demonstrating weakened positions thanks to events which are outside of the control of the team. No prizes for guessing what those events might be.

What is worth noting is that while it is easy to point the finger of blame towards China in the current political climate, take    this explanation from Robbins and Kramer with a pinch of salt. Cisco’s revenues in China might have declined by 25% this year, though the market only accounts for less than 3% of total revenues.

Cisco is no different from any other vendor in the telco space right now. It might be performing healthily, though it is reliant on telcos getting their act together and pushing network investments forward. The 5G bonanza to boost profitability in the telco ecosystem is yet to appear, though there are hints it might be just around the corner (as always…).

“I would say don’t anticipate that being a huge profit driver off of the 5G transition that’s going to come when they build more robust broader 5G infrastructure where they’ll deliver enterprise services and that’s going to come after they do the consumer side,” Robbins said.

“So, it’s a bit unclear when that will take place. I’d say we’re not modelling and don’t anticipate any significant improvement in this business in the very near term.”

This is where the 5G hype can be slightly misleading. There are of course telcos who are surging ahead, but these are only a fraction of the networks around the world. It is promising, but the market leaders or fast followers are not going to flood vendors bank accounts with profits.

There are numerous markets who are still in the testing phases of 5G, with the telcos aiming to figure out the commercial business model to make the vast investments in future-proofed markets work. When we start getting to the steep rises of the bell curve, this is where the profits will start rolling in.

That seems to be the message from the Cisco management team today; we’re in a healthy position, but don’t expect this quarter to blow anyone’s mind away. The 5G euphoria is on the horizon, but investors will have to wait just a little bit longer.

Ofcom fines BT for suspect accounting

Ofcom has fined BT £3,727,330 for reporting inaccurate financials to the regulator, leading to the telco paying lower administration fees to the regulator for five years.

One of the ways in which Ofcom funds its activities is to charge certain companies an annual administration fee. This fee is determined by the total revenues generated by the company. As BT reported inaccurate results between 2011 and 2015, it paid lower administration fees throughout this period.

BT has not contested the fine, and the full sum had been paid to Ofcom on July 29.

“BT’s cooperation with Ofcom in relation to this investigation has been extensive and productive,” Ofcom said in the report.

“Upon discovery of its error, BT informed Ofcom and committed to remedying the consequences of its error. BT has also undertaken extensive work to ensure that its final resubmitted turnover is complete and accurate; had Ofcom had to carry out this work itself, it is likely to have required significant resource and time to complete.”

Although BT does not have the most glimmering record when it comes to accounting in recent years, the telco did own up to the error rather than Ofcom being informed by a whistle-blower.

The error seems to have been identified by BT Group CFO Simon Lowth, who had only been in the role for a year at the time. In September 2017, documents were submitted to Lowth to review the submission of annual turnover for 2016. Upon reviewing the document, Lowth ordered an investigation into the previous submissions dating back to the original General Demand for Information in 2011.

BT believes the oversight was down to human error, an employee misunderstanding the data sources used, though it still does not the most complementary light on the accounting practices of the business.

Aside from this oversight, BT is still reeling from the Italian accounting scandal which was unearthed in 2016. The fraud cost the company more than £530 million, with £8 billion being wiped off the telcos market value in a single day. US investors, represented by law firm Robbins Geller Rudman & Dowd, have recently announced a lawsuit to recover some of the losses.

The £3,727,330 fine might be considered a relatively lenient one, though generally regulators are kinder to the guilty party if it admits to wrong-doing without prompt. The sum was calculated by adding the deficit to interest payments. The Bank of England base interest rate during the 2011-15 period was increased by 1% to get the total.

It is difficult to blame the current management team and workforce for this error, it would have been prior to the tenure of many employees, though it does not reflect well on a company which is attempting to prove it is a successful business.

Apple and Samsung both had a mixed second quarter

While Apple registered modest growth, with the strong performance of Services compensating the declining iPhone sales, Samsung’s revenue and profit continued to plummet, thanks to weakness in the semiconductor market.

Apple’s Q2 2019 results (its financial Q3 2019) were respectable, if not exciting. The total sales went up by 1% to $53.8 billion from $53.3 billion a year ago, therefore making it the company’s record June quarter in terms of revenue. Gross margin slightly declined from 38.3% to 37.6%, and the operating margin dropped from 23.7% to 21.5%.

The iPhone contributed almost $26 billion, a decline of 12% from $29.5 billion the same quarter in 2018. This represented the first quarter when the iPhone accounts less than half of the total revenues since 2012. Notably, the iPhone is the only product category that reported year-on-year decline this quarter, with growth reported in Mac (+10.7%), iPad (+8.4%), Wearables, Home and Accessorie (+48%), and Services (12.6%). The $11.5 billion revenue generated by Services now accounts for 21.3% of the company’s total income.

“These results are promising across all our geographic segments, and we’re confident about what’s ahead,” said Tim Cook, the CEO. “The balance of calendar 2019 will be an exciting period, with major launches on all of our platforms, new services and several new products.”

If by “promising” Cook meant decelerated decline, he was right. Apple’s revenues continued to drop in Europe (-1.8%) and Greater China (-4.1%), the second and third largest markets after the Americas, albeit at a slower pace. Greater China would have registered a growth on constant currency, Cook insisted.

When it comes to the “balance of calendar 2019”, Apple gave a guidance showing mild improvement in Q3 (its financial Q4). The midpoint guidance points to a 16% growth in revenue, largely similar gross margin (38%), similar operating expenses, implying an improved operating margin of about 24%.

While the iPhone’s shrinking contribution may be expected, the strong performance of Services was encouraging. The company claimed it now had 480 million subscriptions across all its service portfolio, and both Apple Pay and the ad income from App Store search delivered triple-digit growth. The 3rd-party subscription revenue generated by the App Store went up by 40%. The Service growth momentum is likely to be further strengthened by the launch of the video streaming service Apple TV+ and the subscription gaming service Apple Arcade in the next quarter. The Services strength helped lift Apple’s share price by 4.2% pre-market.

Apple 2019_Q2A

Apple 2019_Q2B

A few hours later Samsung Electronics announced its less impressive though not surprising Q2 numbers. The company continued to see its profit plummeting by more than half, a trend we have seen in the preceding quarters, and largely in line with the profit warning the company published earlier this month. The total revenues declined by 4% to KRW 56.13 trillion ($47 billion) with the operating profit coming in at KRW6.6 trillion ($5.6 billion), down from KRW14.87 trillion ($13 billion) a year ago, indicating an operating margin of 11.8%, down from 25.4%. The net profit of KRW 5.18 trillion ($4.4 billion) represented a 53% decline from Q2 2018.

Not everything is bleak. IT & Mobile Communications division, Samsung’s largest revenue generator and which includes Samsung’s mobile handset business, reported a 7.8% sales growth although the operating margin declined by 41.5%. The revenue growth was largely driven by the strong sales of the Galaxy A series geared towards the young users. This has helped Samsung gain market share in a contracting smartphone market. On the other hand, the flagship Galaxy S10 series have met “weak sales momentum”, the company conceded. Recently Samsung announced that it has fixed the problem with the Galaxy S10 Fold and is now ready to launch it in “select markets”.

Continued to be worrying is the Display and Semiconductor business division, the biggest profit generator for Samsung. Despite that the display panel business turned profitable after making loss in Q1, weakness in the memory chip segment drove the operating profit down by 71%, on the basis of a revenue decline of 27%, indicating strong price pressure. This has led to the data centre customers to continue to adjust the inventory levels, Samsung claimed.

Another uncertain, though Samsung did not explicitly discuss, is the on-going trade dispute with Japan, which has resulted in trade embargo on the export of selected high-end equipment from a few Japanese companies. This could potentially impact Samsung’s plan to deliver the more advanced semiconductors in the second half of this year. Samsung insisted that it did “see 2H demand recovery” though.

At the time of writing Samsung’s share price was down by 2.6%.

Samsung 2019_2Q

 

Vodafone ponders spin off of European tower business

After reporting declines in group revenues, Vodafone needed to bring some good news to the earnings call, and it seems the creation of a standalone tower business has done the job.

CEO Nick Read announced during the Q3 earnings call work had begun to legally separate the European tower infrastructure business, with plans to have the new organization up-and-running by May 2020. The team intends to monetize the tower business through an IPO or disposal of a minority stake in the next 18 months, dependent on market conditions.

“We will capture industrial efficiencies through network sharing agreements signed in multiple markets, and today we are announcing the decision to create Europe’s largest tower company,” said Read. “We believe there is a substantial opportunity to unlock the embedded value of our towers, and we have started preparations for a range of monetisation options over the next 18 months, including a potential IPO.”

Looking at the revenues, total group revenues declined by 2.3% year-on-year for the quarter to €10.6 billion, with Europe accounting for a 2.1% decline. Italy and Spain accounted for the biggest drops across the continent, though the operational challenges faced here are well-known to all. Germany and the UK both offered marginal growth, but there is hope on the horizon for these two markets.

In both the UK and Germany, Vodafone is readying itself for a more aggressive push into the convergence game with broadband offerings. In the UK, it has partnered with the rapidly expanding CityFibre and launched a 5G FWA offering, while in Germany, the recently approved Liberty Global acquisition will give it more of a presence in the cable market.

“Modest results in a challenging competitive European environment,” said Paolo Pescatore of PP Foresight. The move to lead in 5G with punchy pricing gives it a perfect opportunity to gain momentum. But margins will continue to be under immense pressure with unlimited price plans.”

On the network side, Vodafone is readying itself for an expansive rollout into the 5G world. Being one of the world’s largest operators does sound nice, however the catch is that there are massive financial commitments when it comes to infrastructure overhauls, such as the one the 5G era presents. With a new network sharing partnership in the UK with O2, a tie-up with Orange in Spain and potentially one with Telecom Italia in Italy, the burden could certainly be lessened.

While this is all good news for the operations, the tower infrastructure business will steal the headlines. This is becoming an increasingly common trend in the telco world as operators look to appease the financial appetites of investors by monetizing tower infrastructure assets. On the surface, it does seem to have worked, share price has risen almost 9% in early morning trading.

“Exploring options to float or monetise infrastructure assets is becoming a fashionable play among some network operators, motivated by driving greater value from them and reducing costs,” said Kester Mann of CCS Insight.

“Better asset utilisation and driving greater efficiency has been a leading part of Vodafone CEO Nick Read’s strategy so far. The company has also established a number of 5G network-sharing deals, increased focus on online sales and customer care and replaced many legacy tariffs with new simplified plans.”

O2 sets October deadline to join the 5G race

5G launches are starting to become old news nowadays, but the UK will soon be in the enviable position of having all of its MNOs up-and-running.

O2 has confirmed the on switch will be hit during October, going live in 20 cities by the end of the year, which will be expanded to 50 by the summer of 2020. With Vodafone and EE already live, Three set to launch in a matter of weeks and O2 bringing up the rear, the 5G economy is fast-approaching in the UK.

“O2 will finally join the 5G party,” said Paolo Pescatore of PP Foresight. “This feels somewhat forced upon in light of moves by the other mobile operators.

“Though O2 will be the last to offer 5G services, it is still early days as the network is not widely available. The move is good in the interests of UK and it will be one of the first countries in the world to have all mobile operators offering 5G connectivity.”

Although there are no details on pricing, we get the impression there won’t be anything adventurous or interesting here. During a press briefing the management team attempted to undermine the innovative approach Vodafone showed a couple of weeks ago with its speeds tiered approach to data tariffs, a dig which suggests it will stick with the ‘bigger, faster, meaner’ mentality, which has exhausted the patience of consumers throughout the country.

Another question which remains unanswered is whether O2’s MVNO partners will have access to the same technology, enabling them to also offer 5G services through the O2 network. Agreements have allegedly been signed, but the question of timelines for MVNO partners was met with shrugs.

One area where there is little confusion from the management team is on the radio supply side. Rivals might be getting twitchy over the Governments decision to delay any decision on Huawei, but O2 has elected to stick with its traditional suppliers Nokia and Ericsson. Huawei equipment might be installed on a dozen cell sites around the country, owing to 5G trials, but it does not appear the lack of clarity from the Supply Chain Review announcement will have any detrimental impact at O2.

On the enterprise side of connectivity, this is an area which will be up-and-running sooner rather than later. A new division, known as O2 Business, will launch on August 1, building on the momentum the MNO has been generating over the last couple of months. The enterprise market is an area of significant growth potential for O2, and it does seem to be gaining traction through its open-invitation for R&D with the FTSE 100.

Two examples of this progress include Northumbrian Water Group, we the pair are trialling 5G sensors to manage water quality and prevent leaks, and also with Network Rail for its own 5G trials. COO Derek McManus said the transport network poses one of the most significant challenges for the telco industry, with only a small percentage of tracks, those in the immediate area around stations, being genuinely commercially attractive for network deployment.

Interestingly enough, this 5G announcement will overshadow healthy financial results for the first six months of 2019. Revenues for the period grew 5.1%, while total connections running across the network (O2 and MVNO customers) has also increased to 33 million, up 3.6% year-on-year.

O2 now currently has 25.4 million customers in the UK, commanding churn rates of 0.9% over the first six months. Postpaid net additions were 41,000, a number which increases to 612,000 when you include M2M connections.

What you can expect to see from O2 over the next couple of months is a sustained approach to investment in the 4G network as well as 5G deployments. The management team has suggested consumers are more interested in a more reliable and consistent 4G experience, 31%, while only 11% of respondents to a survey state 5G is a driver for purchasing decisions.

O2 does not have the most glimmering of records when it comes to 4G, regularly battling with Three for last place in Opensignal rankings, though it will be interesting to see how the £358 million over the last six months impacts this performance. O2 has been regularly committing healthy amounts to the CAPEX column over the last 18-24 months, and hopefully this will translate into improved performance sooner rather than later.

While all the 5G launches across the UK are going to be incredibly limited in terms of coverage, we would not recommend rushing to fork out a grand for a 5G capable phone for the moment, the UK is in a very enviable position. In October, all four MNOs will have their first foot through the door, stepping into the 5G economy with the UK as a global leader. Who would have said that would have been possible three years ago?

Snapchat looks like a real business after all

We don’t understand it, but perhaps we’re not supposed to. We do understand numbers though, and the Snap financials are looking stronger each year.

For those who getting a bit ‘longer in the tooth’, Snapchat might look like nothing more than a reel of confusing inside jokes which the younger generations are keeping well beyond arms’ length. It seems like nothing more than a messaging app for the paranoia filled narcissists, but few investors will care about perceptions if the numbers keep heading in this direction.

“We’re proud of the results that our team delivered this quarter,” said CEO Evan Spiegel. “We added 13 million daily actives users, our highest net adds since the second quarter of 2016, bringing our daily active users to 203 million.

“The average number of Snaps created every day grew to more than 3.5 billion this quarter, and average time spent per user was over 30 minutes per day.

“Our revenue growth rate accelerated both quarter-over-quarter and year-over-year to 48%, yielding $388 million in total revenue for the quarter. This growth in our community, engagement and revenue is the result of several transitions we completed over the past 18 months.”

Total revenues reached $388 million for the three months ending June 30, growth of 48% compared to same period in 2018, while net gain on subscribers exceeded numbers expected by analysts. Snap might not be in profit just yet, operating loss totalled $304 million, but the numbers are all heading in the right direction. Snap does seem to be following the traditional route of Silicon Valley in this sense, and profit might not be that far away anymore.

Those who invest in Silicon Valley certainly have to be brave. The latest generation of businesses to emerge insist on significant backers to pump in huge amounts of capital with the vague hope of profits on the very-distant horizon. The early years are focusing on growth, doubling-down on product innovation to cut through the noise in a very competitive segment. Profits are an afterthought, but the likes of Google, Facebook, Amazon, Netflix and Twitter prove an oasis can emerge after years of traipsing through the baron deserts.

In fairness to the Snap team, its innovations are often stolen by other platforms, somewhat of a complement in today’s world. The product itself does not much resemble the app which hit the market in 2011, and while there might have been complaints about updates forced on the user last year, there do seem to be rewards.

Daily Active Users (DAUs) over the last three months increased to 203 million, up from 190 million in the previous quarter and 188 million in the same period of 2018. The average number of Snaps created every day also grew, this time totalling more than 3.5 billion on average over the three months.

Perhaps most importantly however is retention is increasing. There have been fears in the past that Snapchat would be nothing more than a passing fancy, though the team saw more than a 10% increase in the retention rate of people who open Snapchat for the first time.

The appeal of this app to the younger generations is unquestionable, Spiegel claims 75% of the 13 to 34 year-old population in the US is active on Snapchat, but questions remain over the commercial viability of the platform but also retention rates for older generations.

On the advertising side, this is an area which has certainly improved. Like Twitter last year, Snap has made it easier for advertisers to create content for the platform but also manage campaigns. This might sound simple, but for developers who have traditionally focused on user engagement this could have been an afterthought. It appears there is becoming a much healthier mix of user engagement and advertising appeal on the platform to ensure revenues can continue to grow.

The team is also making encouraging progress on augmented reality, a technology which promises a lot from both engagement and revenue perspectives. Few have been able to make this technology work to its full potential, but the Snap team have proven numerous times over the last few years they are leaders when it comes to innovation.

The Snapchat app might be an enigma when it comes to the older generations, they might not understand why it is appealing, but who are they to second-guess why. Numbers speak for themselves, and while Snap is a long-way from profit, the trends are certainly heading in the right direction.

Snap Q3 2019

Jio surges forward with subs and profits

Reliance Jio has unveiled its latest quarterly figures and, surprise surprise, subs are once again on the up as well as profits.

Monthly ARPU might have be on the decline, down to $1.77, a trend which is not showing signs of slowing, but scale seems to be the answer for Jio. The firm now has a subscriber base of 331 million, adding 24.5 million over the last three months and 116 million during the last year.

“Growth in Jio mobility services has continued to surpass all expectations,” said Mukesh Ambani, MD of Reliance Industries, Jio’s parent company.

“In less than two years of commercial operations, Jio network carried almost 11 Exabytes of data traffic during the recently concluded fiscal quarter. Jio management is focused on giving unmatched digital experience at most affordable price to every citizen of the country, and accordingly expanding the network capacity and coverage to keep pace with demand.”

The progress which has been made by the firm over the course of the last two years is remarkable and perhaps demonstrates how under-developed the Indian market actually was. Although India has been seen as a growth economy, part of the now old-fashioned BRICs group, it wasn’t until Jio shook up the market the digital revolution took hold.

Average consumption of data is now up to 11.4 GB a month, with Jio suggesting customers used 10 exabytes over its network during the quarter. The Indian consumer certainly has an appetite for data and they don’t seem to be satisfied whatsoever.

Looking at the financials, these are also very promising. Early criticism of Jio was that it was negatively impacting competition in the market as there was little profit being made by the firm. This is generally seen as a negative, as running loss leaders to kill off competition very rarely works for the greater good in the long-term, though the numbers speak for themselves.

Quarterly revenues increased 44% year-on-year, while the firm collected profits of $119 million, a 45% year-on-year boost. These numbers are attractive for the moment, but profitability currently looks to be reliant on scale and subscriber growth. Sooner or later, this growth will slow, and the team will have to look at the worrying rate at which ARPU is declining.

Period Q1 2019 Q3 2018 Q1 2018
ARPU (Indian Rupee) 122 130 154