Webscale Network Operators: 3Q20 Market Review

Webscale Network Operators: 3Q20 Market Review
Webscale sector revenues spike 16% YoY in 3Q20 to just under $1.6 trillion on annualized basis; capex growth returns
By Matt Walker

COVID-19 forces the world to become even more online

The COVID-19 pandemic has depressed economic growth globally but spurred faster growth in the webscale sector. The sudden, widespread need to work and study from home has increased demand for the cloud services offered by many webscale players. The need for social distance has caused an uptick in usage of social media platforms such as those offered by Facebook, similarly kicking up growth rates. Consequently, revenues in the webscale sector grew by over 16% in 3Q20 on a YoY basis, pushing up annualized revenues to just below the $1.6 trillion mark.

Capex up 25% YoY to $34.7B in 3Q20

Technology investments by the webscale sector are also on a tear. R&D spending increased by 17% in 3Q20 to $46.1 billion, pushing the annualized R&D to revenue ratio for webscalers up to 10.8% (10.7% in 3Q19). Webscale spending on their network infrastructure has also spiked. Total capex rose 25% YoY to hit $34.7 billion in 3Q20, increasing annualized capital intensity from 7.5% in 3Q19 to 7.6% in 3Q20. A good portion of capex in 2020 has supported the growth of ecommerce activity, which was given a lift by pandemic-related lifestyle changes. However, the Network/IT/Software portion of capex grew 31% YoY in 3Q20 to $16.0 billion. New data center construction slowed in 2020 but rapid growth of traffic and cloud services adoption forced operators to invest heavily in new servers and other incremental capacity additions.

The network spending of big webscalers is centered around immense, “hyperscale” data centers and undersea cable systems that support network traffic from the tech companies’ online retail, video, and social media platforms, along with cloud services. Webscale network operators (WNOs) may also own access networks, typically using fiber, microwave or mmWave, and even fixed satellite. WNOs exploring outer space for providing connectivity include Amazon, Apple, Alphabet, Facebook, and Microsoft. Out of these, Amazon’s efforts gained fruition recently with the FCC approval for its satellite broadband initiative, Project Kuiper, to deploy and operate a constellation of 3,200+ low earth orbit (LEO) satellites. Satellite investments from non-webscale players such as SpaceX (Starlink) is heightening the webscale activity.

A broad set of vendors are benefiting from WNO capex spending – from semiconductor players selling into the data center market (Intel, AMD, Nvidia, Broadcom, etc), to optical components & transport vendors selling into data center interconnect markets (Ciena, Infinera, Neophotonics, Lumentum, etc.), to contract manufacturers of white box/OCP servers (Wistron and Quanta).

Profitability holding steady, cash reserves continue to rise

As the webscale sector’s topline has surged during the pandemic, the sector’s bottom line profitability has held steady. Free cash flow and net income margins have remained high over the last few quarters, on an annualized basis. FCF margins declined slightly in 3Q20 from 2Q20, due to a capex uptick, but remain high relative to many other industry sectors. Net profit margins increased slightly in 3Q20, and are also high on a relative basis. As webscale players continue to generate healthy margins, their cash reserves also grow. At the end of 3Q20, the webscale sector’s cash on hand rose to $739 billion, with total debt at a much lower level of $495 billion.

There are signs of increased regulatory pressure coming to bear on key players in the webscale sector. In China, Alibaba’s recent failed attempt to IPO its Ant Financial business is an example. Two years ago, Tencent faced regulatory restrictions on its gaming business which ate into growth. At the same time, China’s latest round of infrastructure investment targets are heavily dependent on the cooperation of these two private sector companies. In the US, a new President will be inaugurated in late January 2021. There is a lot of pressure to either break up or more severely regulate key players in the US webscale ecosystem, including Alphabet and Facebook. Public concerns about abuses of privacy, facilitation of fake news, and monopolistic or (at the least) oligopolistic behavior will make it nearly impossible for these companies to stem the increased oversight likely to come soon from policymakers. Australia’s pending law, the “News Media and Digital Platforms Bargaining Code,” could foreshadow things to come for the webscale sector.

Spending and investment trends by key operators

A sub-group of important WNOs, the “Top 8”, continues to be important for tracking the sector. This group includes Alibaba, Alphabet, Amazon, Apple, Baidu, Facebook, Microsoft, and Tencent. Four of these accounted for at least 10% of total WNO capex in the twelve-month period ending September 2020 – all based in the US: Alphabet, Amazon, Facebook, and Microsoft. In 3Q20, Amazon was the standout, accounting for over 30% of industry capex, as its total capex more than doubled year over year.

Capex-related developments for select WNOs are summarized below:

  • Amazon: its $11.1B of 3Q20 capex accounted for 32% of total WNO sector capex. While total capex surged in part due to its big capacity increase on the ecommerce fulfillment side, its AWS cloud division was also a big driver. The company said it “pulled forward a bit from 2021” to satisfy demand and “we’ll see again what that implies for next year”.
  • Alphabet: its $5.4B in capex for 3Q20 amounted to 16% of market total, but represented a 20% drop from the 3Q19 figure. The company saw revenues actually decline in 2Q20 YoY (but return to growth in 3Q), and continues to benefit from its big 2018 cloud buildout, so is relatively conservative. It noted that servers were the main driver of investment in 3Q20, followed by (new) data centers. Its 2020 capex will come in below 2019 but it does “intend to maintain a high level of investment given the opportunity we see”.
  • Microsoft: its $4.9B in capex represents its biggest quarter ever, up 45% from the 3Q19 figure of $3.4 billion. The company’s capex represented 14% of the webscale sector’s total in 3Q20. Some of the capex surge is a shift away from finances leases, used relatively more frequently in 2019, but the growth is still sizable. Azure was a big factor. The company noted that “As customers accelerated their digital transformation, we saw strong demand for differentiated cloud and hybrid solutions, resulting in increased customer commitment to our platform and higher usage.”
  • Facebook: its capex was relatively flat in 3Q20, totaling $3.7B, up about 4% from 3Q19. Facebook’s capex was 11% of the 3Q20 market total, and driven by investments in data centers, servers, office buildings and network infrastructure. One new facility came online in 3Q20, the company’s 17th data center in Gallatin, Tennessee. Total capex for 2020 is projected to be $16B, up from $15B in 2019, but 2021 will be a big year: Facebook expects capex in the range of $21 to $23 billion. This surge is in part planned to cope with construction delays faced during the COVID-19 crisis.
  • Alibaba and Tencent accounted for 6% and 4% of WNO capex in 3Q20, respectively, ranking 5 and 7 for the quarter. Both saw big double digit YoY increases in 3Q20, spurred on by the Chinese government push to get private sector players to invest more in cloud and related technology infrastructure.
  • Apple has continued to rely primarily on partners for much of its cloud network infrastructure, but did rank 6 in 3Q20 with $1.8B in total capex (down 36% YoY).
  • IBM: while not part of the “Top 8” group, IBM’s capex in 3Q20 ranked 8, coming in at $725 million, down 2% YoY. The company is in the midst of a major reorganization, spinning off the managed services unit. One purpose is to focus on its “future as a hybrid cloud platform and AI company”, with Red Hat an important element of that. Future capex will likely see an uptick.

MTN Consulting will be issuing its annual forecast of network operator spending in December, 2020. For the webscale sector, we expect total revenues of $1.63 trillion and capex of $122 billion, with likely 2021 growth of 10% and 17% respectively.

MTN Consulting’s 3Q20 WNO Market Review analyzes the network infrastructure spending and financial position of webscale network operators (WNOs).

WNOs are web-centric companies who own and operate large multi-country communications networks based upon hyperscale data centers and submarine cables. Webscale operators may also own access networks, typically using fixed satellite or fiber. WNOs own network assets in order to support their core businesses, which comprise digital advertising, online retail, cloud, digital media and content services, and other digital-based services. The webscale segment excludes companies with digital business models who rely primarily on rented cloud capacity or collocation space. Twitter, for instance, is not a webscale operator, as its network relies on a mix of rented space in carrier-neutral data centers and rented cloud resources from Google. By contrast, Apple is webscale; although it has partnerships with GCP and AWS for cloud capacity, Apple owns several large data centers, and is building more.

WNOs tracked in this report include the “Top 8” companies (Alibaba, Alphabet, Amazon, Apple, Baidu, Facebook, Microsoft, and Tencent) and 12 others: Altaba, ChinaCache, Cognizant, eBay, Fujitsu, HPE, IBM, JD.COM, LinkedIn, Oracle, SAP, and Yandex.

Coverage:

  • Global coverage with company-level drilldowns of 20 companies
  • Company-level annualized and quarterly trends across >10 financial data series
  • Network-related spending estimates at market- and company-level, across quarters
  • Revenues broken out by region for each company

More details are available in the “sample file,” above

Table Of Contents

  1. Abstract
  2. Analysis
  3. WNO Market: Key Stats thru 3Q20
  4. Company Drilldown
  5. Top 8 WNOs
  6. Company Benchmarking
  7. Regional Breakouts
  8. Raw Data
  9. Exchange Rates
  10. About

Figures & Charts

  1. Key Metrics: Growth rates, Annualized 3Q20/3Q19 vs. 2011-19
  2. WNO Revenues: Single-quarter & annualized (US$M)
  3. Top 8 WNOs: YoY revenue growth in 3Q20
  4. Annualized profitability: WNOs
  5. Free cash flow per employee, 3Q20 annualized (US$)
  6. FCF Margins vs. Net Margins, 3Q20 annualized
  7. Advertising revenues as % total (FY2019)
  8. Annualized capex and R&D spending: WNOs (% revenues)
  9. WNO capex by type, Annualized: 3Q15-3Q20 (US$M)
  10. Network & IT capex as share of revenues, 3Q20 annualized
  11. R&D expenses as % revenues, Top 8 WNOs (3Q20 annualized)
  12. Acquisition spending vs. capex spending, 1Q14-3Q20 annualized (US$M)
  13. Net PP&E per employee (US$’ 000) – 3Q20
  14. Ranking the Webscale Network Operators: Revenues; R&D; Capex; Network & IT capex – 2019 & 3Q20 (US$B)
  15. Revenues: annual, single-quarter, and annualized (US$M)
  16. Profitability (Net Profit; Cash from operations; Free cash flow): annual, single-quarter, and annualized (US$M)
  17. Spending (R&D; M&A; Capex; Network & IT capex; Lease): annual, single-quarter, and annualized (US$M)
  18. Cash & Short-term Investments: annual and single-quarter (US$M)
  19. Debt (Total debt; Net debt): annual and single-quarter (US$M)
  20. Property, Plant & Equipment: annual and single-quarter (US$M)
  21. Key Ratios: Net margin; R&D/revenues; Capex/revenues; Network & IT capex/revenues; Free cash flow/revenues; Lease costs/revenues – annual and annualized (%)
  22. Total employees
  23. Revenue per employee, annualized (US$K)
  24. FCF per employee, annualized (US$K)
  25. Net PP&E per employee, annualized (US$K)
  26. Revenues & Spending (US$M)
  27. Webscale Business Mix by Revenues (FY2019) – MTN Consulting estimates
  28. Top 10 recent acquisitions & investments
  29. Revenues (US$M) & YoY revenue growth (%), single-quarter: by company
  30. Revenues, annualized (US$M): by company
  31. Annualized profitability margins: by company
  32. Annualized capex and capital intensity: by company
  33. Annualized capex and R&D spending as % of revenues: by company
  34. Share of WNO network & IT capex, Annualized: by company
  35. Total employees: by company
  36. Annualized per-employee metrics (US$000s): by company
  37. Net debt (debt minus cash & stock) (US$M): by company
  38. 2011 vs. 2019: company benchmark by KPI (Revenues, R&D, Net profit, Cash from operations, Capex, Free cash flow, Cash & short-term investments, Net PP&E, Total debt)
  39. 2011 vs. 2019: company benchmark by key ratio (Capex/revenues; R&D/revenues; Net margin; FCF margin)
  40. Top 8 WNO’s share vs. Rest of the market: by KPI (Revenues, R&D, Net profit, Cash from operations, Capex, Free cash flow, Cash & short-term investments, Net PP&E, Total debt)
  41. Top 8 WNOs benchmarking by Key ratio: Capex/revenues; R&D/revenues; Net margin; FCF margin)
  42. Total WNO Market Revenues, by region: Latest CY; Latest Quarter; Annual trend (2011-19); Single quarter (1Q14-3Q20)
  43. Regional revenues by operator: Latest CY; Latest Quarter; Annual trend (2011-19); Single quarter (1Q14-3Q20)
  44. Top 10 operators by region: Latest CY; Latest Quarter

Coverage

Top 8 WNOs
Alibaba Alphabet Amazon Apple
Baidu Facebook Microsoft Tencent

 

Other WNOs
Altaba ChinaCache Cognizant eBay
Fujitsu HPE IBM JD.com
LinkedIn Oracle SAP Yandex

Visuals


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