Xiaomi grows in Q1, but Q2 is where the danger lies

Xiaomi has reported revenue and profit rises through to March 31, but let’s not forget this does not include the period of extensive lockdowns in European markets.

With total revenues coming in at roughly $7 billion, a year-on-year increase of 13.6%, profits grew by 10.6% to approximately $320 million. Considering the backdrop of COVID-19, this would be considered a healthy performance through the three-months, though investors will have to brace for the impact of societal lockdowns during April and May in Western Europe, a growth region to Xiaomi.

“Although the industry is facing severe challenges, the Group still experienced growth in all segments despite the market downturn, which fully reflects the flexibility, resilience and competitiveness of Xiaomi’s business model,” said Xiaomi CEO Lei Jun.

“We believe a crisis is the ultimate litmus test for a company’s value, business model and growth potential. As the impact of the pandemic starts to ease, we will continue to focus on the ‘5G + AIoT’ strategy and strengthen our scale of investment, in order to let everyone in the world enjoy a better life through innovative technology.”

Jun might be positive, but it is dampened success in comparison to previous quarters,

Xiaomi year-on-year financial performance for 2019
Period Revenue Profit
Q4 +27.1% +34.8%
Q3 +5.5% +20.3%
Q2 +20.2% +49.8%
Q1 +27.2% +34.7%

Source: Xiaomi corporate blog, Mi Global

Although there was a dip in performance during the third quarter, which could be attributed to a slowdown in smartphone shipments in its Chinese domestic market, Xiaomi is a company which has been on the rise. Success has been in the international markets primarily, and the executive team will hope the dampened success will only be temporary as the world begins to open-up again.

The issue is April and May, which will show up in the next quarterly earnings report. International revenues have been a significant driver for Xiaomi in recent years, and this quarter saw 50% of revenues attributed to the overseas markets.

Over the first three months of 2020, IDC attributed 31.2% of shipments in India to Xiaomi, while Canalys estimated Xiaomi’s smartphone shipments grew by 58.3% year-on-year in the European markets, accounting for 14.3% market share. In Italy, France and Germany it ranked it the top four smartphone manufacturers, while it claims to be number one in Spain. The growth numbers in LATAM, the Middle East and Africa were even more impressive.

Unfortunately, the majority of markets where Xiaomi is seeing success are the ones where lockdown has been severely impacting smartphone sales. In Europe, IDC said smartphone revenues could be down 10% optimistically, but worst case scenario could see sales slashed by as much as 47%.

Xiaomi has estimated that as of mid-May, the weekly number of smartphone activations in the European market had returned to over 90% of the average weekly level in January. Sales are gradually beginning to recover, but they are still not at the levels which would have been expected and more than half of this quarter has already passed. It is not a good sign, but these are certainly extenuating circumstances.

Investors have not exactly been thrilled with the news either. Xiaomi share price, on the Hong Kong stock exchange, is down 2% at the time of writing having started the day with a brief surge.

The saving grace for Xiaomi is diversification, however.

One business unit is leveraging the Xiaomi brand and existing customer base to drive sales in IoT and lifestyle products segment. The IOT platform now has 252 million connected IoT devices on it (not including smartphones and laptops), while there have also been progress in selling TVs, wireless earphones, electric scooters, robot vacuums and wifi routers. The business seems to be passionately and aggressively embracing diversification.

The second important area of diversification is Xiaomi’s internet services. With revenues of $830 million, a year-on-year increase of 38.6%, the division accounts for 11.6% of total revenues, up from 10.1% in Q4 2020 and 9.9% in Q3 2020. This division is slowly becoming more prominent but most importantly, this is recurring cash, the holy grail in the digital economy.

Xiaomi is another Chinese company which has been embraced by the international markets in recent years, a critical driver of revenue growth, but this progress might prove to be the source of great pain during the second period of 2020.

T-Mobile bags 452k subs as 5G starts to roll

An additional 452,000 branded postpaid subscriptions and churn of 0.86% should be enough to put a smile on the face of T-Mobile investors as share price soars 9%.

The majority of telcos might be scrapping and scraping against wider industry trends, but T-Mobile investors will be very pleased with how the business is progressing. Not only has the long-awaited merger with Sprint been formally approved, the financial spreadsheets are also proving to be a success.

“Just five weeks ago, we merged with Sprint to create the New T-Mobile, and we’re more excited today than ever before about the massive value creation opportunity and synergy potential that lies ahead,” said CEO Mike Sievert.

“We are off to the races laying the foundation for the future of the New T-Mobile as we work to execute on our business plan and harness the incredible opportunity ahead.”

T-Mobile financial results for period ending March 31 (USD ($), millions)
Total Year-on-year
Revenues 11,113 0.3%
Service revenues 8,713 5.3%
Net income 951 4.7%
Free cash 732 18.4%

Source: T-Mobile US Investor Relations

And while these are encouraging figures, the real fun is about to being. Sievert has the pleasure of integrating T-Mobile’s operations with Sprint’s.

Having been formally kicked-off on April 1, the two organisations will become one. This means scaled deployments, rationalising the retail footprint and pushing forward with 5G. The latter is perhaps the most interesting element, and the one which will give the best opportunity to close the gap on AT&T and Verizon.

In terms of a 5G offering, T-Mobile now looks to have the most complete proposition. It has access to mmWave spectrum for high-speed downloads, 600 MHz bands for coverage and, thanks to the Sprint merger, 2.5 GHz mid-band spectrum to blend together speed and coverage. This is a 5G assault which ticks all the boxes which is currently in play in Philadelphia with New York next on the roadmap.

T-Mobile still lags behind AT&T and Verizon, but a carefully crafted and aggressive drive towards 5G could shift market dynamics very quickly.

Subscribers for US mobile network operators
Total subscribers 5G subscribers***
AT&T 176,510232 14,416,872
Verizon 182,554,002 16,560,150
T-Mobile and Sprint 114,359,944 18,560,447

*** Forecast by Omdia over the next twelve months

Orange, Proximus and KPN feature in a tsunami of financial results

Today has seen an avalanche of financials fall on the industry, as Orange, Proximus, Millicom, Ooredoo, Swisscom, Telenet and KPN all release earnings statements.

Orange Group quarterly financials (to March 31, 2020) – Euro, millions
Metric Quarterly total Year-on-year growth
Revenue 10,394 +1%
Operating profit 2,602 +0.5%
CAPEX 1,580 -3.1%

“During this first quarter, the final weeks of which were struck by an unprecedented crisis linked to the Covid-19 pandemic, the Group continued its growth momentum in terms of revenues (+1.0%) and EBITDaL (+0.5%),” said Orange Group CEO Stéphane Richard.

“This growth has been underpinned by strong performances in our Africa & Middle East business, progress in the Enterprise market, in France and in Europe.

“The importance of telecoms in this crisis in ensuring the continued functioning of the economy and of our societies confirms the strategic nature of our activities and provides further confirmation for our strategy in very high-speed networks.”

Proximus Group quarterly financials (to March 31, 2020) – Euro, millions
Metric Quarterly total Year-on-year growth
Revenue 1,393 -1.5%
Operating profit 464 +0.3%
CAPEX 232 +5.9%

“With most of Proximus’ business showing a good level of resilience in these exceptional circumstances, along with our strong cost management, we realized stable EBITDA,” said Guillaume Boutin, CEO of the Proximus Group.

“It’s clear we are not fully immune to the ongoing COVID crisis, and we expect the impact to become more apparent over the next quarter. The economic recovery remains uncertain and especially Roaming and ICT projects are exposed to further negative effects.

“While it’s very difficult to have a clear view of what the overall impact will be, so far, there are no signs the financial effect would be worse than what we have anticipated, with the EBITDA effect largely being offset by a lower capex. We therefore reiterate our 2020 full-year guidance of Group EBITDA Capex of EUR 780-800 million.”

Millicom quarterly financials (to March 31, 2020) – Euro, millions
Metric Quarterly total Year-on-year growth
Revenue 1,088 +5.1%
Operating profit 134 -17.1
CAPEX 174 +3.4%

“In light of the severe impact that COVID-19 is having on the global economy and in many of our markets, we have already implemented significant measures to help us navigate through these challenging times, which we anticipate will impact our revenue at least through the remainder of 2020,” said Millicom CEO Mauricio Ramos.

“These measures include a reduction in capex made possible by focusing largely on adding network capacity while deferring other investment plans, and the implementation of new cost savings initiatives.”

Ooredoo Group quarterly financials (to March 31, 2020) – QAR, millions
Metric Quarterly total Year-on-year growth
Revenue 7,295 +1%
Operating profit 3,023 -5%
CAPEX

“In Q1 2020 Ooredoo Group has increased our revenue and we have delivered good results Growth was driven by strong performances in most of our markets, and in particular in Indonesia and Tunisia where revenues grew 7% and 16% respectively, supported by Indosat Ooredoo’s refreshed strategy and the implementation of Ooredoo Tunisia’s value creation plan,” said Group CEO Sheikh Saud bin Nasser Al Thani.

“Business in Myanmar has been growing as well. Ooredoo Qatar continues to be our highest revenue generator, reporting QAR 1.8 billion in total revenues for Q1 2020.

“The implementation of nationwide lockdowns across many of our geographies impacted EBITDA as margins came under pressure due to changing customer behaviour. EBITDA for Q1 2020 was QAR 3.0 billion compared to QAR 3.2 billion for the same period last year. We continue to implement strong cost optimisation programmes across all our OpCos to manage some of the impact from the pandemic and weakening economic activity.”

Swisscom quarterly financials (to March 31, 2020) – CHF, millions
Metric Quarterly total Year-on-year growth
Revenue 2,737 -4.3%
Operating profit 1,111 -0.7%
CAPEX 516 -0.4%

“The market environment is challenging. But Swisscom’s results are sound, given the circumstances. The demand for our bundled offerings continues. Our network is the foundation of our success. This is evident in the current COVID-19 crisis,” said CEO Urs Schaeppi.

“Meetings via video conference in the home office, distance learning in the children’s room and contact with friends via telephone and FaceTime are now part of everyday life – with corresponding effects on the infrastructure.

“We recorded 70% more mobile phone calls in March than in the previous month. And in the fixed network, we reach peak levels every evening at prime time with TV and streaming services. Before the crisis, this only happened on Sunday evenings. Swisscom’s networks are continuing to hold their own, even at this time.”

Telenet Group quarterly financials (to March 31, 2020) – Euro, millions
Metric Quarterly total Year-on-year growth
Revenue 653 +4%
Operating profit 153 +2%
CAPEX 172 0%

“Against the backdrop of these current exceptional circumstances, I’m pleased with the solid underlying operational performance in Q1, continuing the improved momentum we’ve seen since the second half of last year,” said Telenet CEO, John Porter.

“While gross sales have clearly decreased since the closure of our retail stores as of mid-March, this effect was more or less compensated by lower annualized churn. We had a particularly strong quarter in broadband, adding 8,100 net new subscribers and marking our best quarterly performance since Q2 2016.”

KPN quarterly financials (to March 31, 2020) – Euro, millions
Metric Quarterly total Year-on-year growth
Revenue 1,329 -2.4%
Operating profit 216 +14%
CAPEX 278 +6.3%

“From a business perspective, COVID-19 has had a limited impact on our operational KPIs and financial results in the first quarter,” said KPN CEO, Joost Farwerck. “We continued with the execution of our strategic plan and saw continued intense competition in the Dutch market, resulting in a lower customer base in Consumer.

“Mobile postpaid ARPU in consumer stayed at € 17 for the fifth consecutive quarter. In Business, we made again solid progress with customer migrations towards our KPN EEN portfolio; 82% of our SME and 62% of our LE customers migrated from traditional fixed voice or legacy broadband services.

“We continued to digitalize and simplify our organization, which led to strong cost savings in the quarter. In Wholesale, the announced assessments of regulated tariffs were discontinued by regulator ACM following the CBb court ruling on wholesale fixed access regulation

Diversification helps Google ride the waves of coronavirus turbulence

Alphabet-owned Google certainly felt the pinch of COVID-19 over the last few weeks of the quarter, but CEO Sundar Pichai identified diversification as key to managing the crisis.

While few would complain when looking at the Google spreadsheets over the last three-months, it might not be living up to the milestones it has set itself in previous years. 13% year-on-year growth could be considered miserly in Google’s standards, but the coronavirus pandemic is a crisis few have experience with.

That said, investors are clearly pleased with the was Pichai and the team are managing the difficulties as share price shot up 8% during pre-market trading.

Google Q1 Financial Results (USD ($), millions)
Metric 2020 Year-on-year
Total revenues 41,159 +13%
Operating income 7,977 +20%
Net income 6,836 +3%

These are all attractive numbers, though coronavirus has inflicted a dent into the business. Pichai highlighted online advertising demand, the core revenue machine of the Alphabet group, was severely weakened from March onwards, as the full-impact of COVID-19 forced society and the economy to close doors.

Performance of individual business units (USD ($), millions)
Business Unit 2020 Year-on-year
Google Search 24,502 +8%
YouTube 4,038 +33%
Network Members’ properties 5,223 +4%
Google Cloud 2,777 +52%
Other Bets 135 -21%
Google other 4,435 +22%

In today’s world, where there is still plenty of unrealised profits in the digital economy, making money does not seem to be good enough. Investors demand high-growth year-on-year, partly due to what is available and partly because they have become used to it. This is the challenge which the likes of Google, Amazon and Facebook are facing; matching the success of yesteryear.

But in this period of uncertainty, it does appear to be a case of damage limitation. Like the financial crisis of 2008, everyone will be impacted but Google has somewhat of an advantage.

“…our business is more diversified than it was in 2008,” Pichai said during the earnings call. “For example, Cloud. In the public sector, we are helping governments delivered critical health and social services. We are supporting the state of New York, new online unemployment application system as it deals with a significant increase in demand.

“In retail, we have held Loblaw, one of Canada’s largest food retailers, and Wayfair, scale to support exponential traffic increases. We are helping communication companies adapt to new behaviour patterns. Vodafone is using Google Cloud platform to help that analyse network traffic flows to keep everyone connected, and we are helping Unity Technologies keep real time online games stay up and running.”

Google Cloud is the business unit which is perhaps profiting the most from the current crisis as more companies are forced through a digital transformation programme to embrace cloud solutions and enable workforce mobility. Some might complain about Google sinking billions into the Moonshot Labs every year, but this is the very reason why.

The more diversified revenues are, the more resilient a business is when faced with turmoil, irrelevant as to whether it is precedented or unprecedented. Google now has online advertising, cloud and video as three major sources, with plenty more bubbling away.

Over the three-month period, Alphabet CFO Ruth Porter said revenues for the Other Bets unit were $135 million, while operating loss was $1.1 billion. This might seem like a remarkable number, but these losses could eventually turn into the next Moonshot Graduate to make billions for the Group. Let’s not forget, the cloud business unit, YouTube, Maps and Android were all cultivated in these labs.

Currently in the experimental unit is Google’s self-driving car project Waymo, a delivery service using specialized drones known as Wing, life science tech unit Verily, smart city initiative Sidewalk Labs and Makani, an attempt to create renewable energy from propellers on airborne kites. Outside of these homegrown experiments, Google purchased Fitbit for $2.1 billion last year, taking it into the world of wearables.

Each quarter, the core advertising business unit brings in billions in profit, but dependence on these revenues are lessened. As the alternative revenue streams gather momentum, Google becomes more diversified and much more capable of managing global crisis’ which could cripple rival firms.

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.”