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5G Data Economy Weekly Newsletter No. 48

Dear friends,

This is a weekly newsletter of what we've seen in 5G and 5G-enabled data economy, ranging from technology to policy and business application. It's designed to keep you engaged and we also try to make it interesting. Enjoy reading! Not a subscriber yet? Sign up here
Keysight Technologies Investor Day: 5G is Far From Peak for Us

Keysight Technologies hosted its 2020 investors day at NYSE on March 3rd and we attended it and loved the update from the management team. We highly recommend our readers who are interested in the forefront of 5G development to listen to the replay. 

For our readers who are not too familiar with the company: Keysight is a leading player of the wireless testing market (25% of market share) and started investing in 5G as early as 2013. Different from the 4G cycle where it only captured the manufacturing side of the business (handset, low testing value), Keysight's advance in 5G technology has allowed it to dominate the R&D side of the business, which can be seen in its recent financial success (chart below). The management also recognized the potential of 5G is not only limited to the wireless connectivity and the physical layer of it. As a result, Keysight has been expanding its testing solution to the protocol layer (vertically) and to the wireline connectivity (horizontally, such as datacenter, etc.). 
 
We use Keysight as an early indicator to gauge where we are in the 5G cycle. There is an elephant in the room for Keysight investors as, sooner or later, there will be a big peak of 5G deployment coming. When is it for Keysight per se? The management wrote off the concern by offering three reasons:
  • More on R&D vs. manufacturing which was lumpy; Engineers don't sit around on their hands and they will continue R&D for the next-generation technology and Keysight will be there.
  • Even in manufacturing, Keysight is more onto value-added, such as components and base stations. The testing that goes on for base stations is an order of magnitude higher than handsets.
  • Last but not least, the expanded scope of the total solution mentioned above.     
Google and AT&T: Moving to Edge, Together

Google Cloud CEO Thomas Kurain recently emphasized the importance of edge cloud and "bringing the cloud technology to a 5G network." It's no surprise that, on March 5th, Google Cloud unveiled several strategies to keep up with cloud rivals in the telecom industry:
  • Global Mobile Edge Cloud (GMEC)
  • Collaboration with AT&T for enterprise services
  • Anthos for Telecom, an open-source Kubernetes service for telos
Google Cloud’s series of announcements confirmed our view that centralized cloud applications are rapidly moving to edge. As a result, developers are increasingly using “container/ Kubernetes” or “serverless” to better adapt to the edge computing architecture.

It is worth noting that the Google Cloud & AT&T partnership on edge solutions focuses specifically on several vertical industries such as manufacturing, retail, transportation, and gaming. It is different from the comprehensive partnership that AT&T/Microsoft signed in 2019. We reckon that Google Cloud is getting more competitive in the three-horse race among AWS, Azure, and Google. We expect to see more partnerships between cloud vendors and global/regional telecoms in the future.

Ironically, despite the partnership, WSJ reported that AT&T is also cooperating with DOJ on the antitrust case against Google. It is a classic frenemy business practice. While on one hand, AT&T needs to leverage Google Cloud to better monetize 5G through business services; On the other hand, AT&T is competing with Google on advertising dollars through its Xandr advertising division (formally AppNexus).
Earnings Update: Sea and Splunk

Sea: On March 3rd, Sea Ltd reported another set of strong hypergrowth results. The adjusted revenue for “Digital Entertainment” grew 107% YoY, driven by the increase of active users (355M, up 62%), paying users (33.3M, up 179%), and continued success of self-developed game “Free Fire” globally. The eCommerce segment (Shopee) is even more impressive, with the adjusted revenue up 198%. Shopee’s GMV, gross orders, monetization rate, and unit economics all improved substantially. The management commented that Shopee’s growth is faster than its smaller rivals even at a larger scale. They also guided that the impact of the COVID-19 outbreak will be limited. With a unique combination of gaming/eCommerce/payment, a large TAM in the emerging Southeast Asia market, and improving margins/unit economics, we think Sea is just getting started to be a much larger consumer internet platform company
 
Splunk: On March 4th, Splunk reported FQ4'20 earnings that slightly beat revenue, but missed on EPS and cash from the operation. Its guidance on revenue and operating margin were also below expectations. Splunk is undergoing a two-step transition from “license to term license” (mostly completed, revenue pulled forward), and from “term license to the cloud” (revenue will underperform). We think Splunk’s results will continue to be lumpy as Wall Street analysts are having a hard time evaluating the company’s fundamentals complicated by confusing accounting metrics.
Nokia: Revamping 5G Effort

In general, we are not a big fan of the telecom equipment business for their commoditized products and lack of pricing power, despite all the 5G hypes around Ericsson, Nokia, and ZTE, etc. Don't get us wrong, they are important for the deployment of 5G services. They just have a hard time generating value for investors, in our opinions. Among the few players remaining in the field, Nokia is the one we like the least.  

Hence we are not surprised by the stepping down of Nokia CEO Rajeev Suri. Mr. Suri will leave his post on August 31st, 2020 after a 25-year career at the company. During his tenure, Suri was instrumental in
  • Turnaround of Nokia Siemens Networks (NSN)
  • Ramping up Technologies business (578mn EUR sales in 2014 to 1.5bn EUR sales in 2019 with significant margin expansion)
  • Acquisition of Motorola Networks to gain access to NA and Japan Markets
However, stumble on 5G products is too big a mistake to ignore. We believe this is the right thing for the board to do. We can feel the urgency from the company as they are trying to revamp their efforts in 5G:
  • Secured 5G chip partnerships with Intel and Marvell, aiming to improve Nokia's ReefShark family of chipsets powering its radio access products. Link
  • Drew $561mn loan for 5G R&D. Link 
Let's see if Nokia can pull it off. 
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