Chandler, Arizona (USA), June 25, 2018 – Revenues for the tech & social media companies operating the world’s largest, “webscale” data centers grew 26% to $232 Billion in 1Q18. That’s a bump up from the full-year growth in 2017 of 21%. This surge has come along with healthy profit margins and free cash flow (Figure 1)
Source: MTN Consulting, LLC
Capex over 8% of revenues in 1Q18
Webscale network operators (WNOs) invested $24.2B in capex in 1Q18, up an astounding 89% YoY. That’s over 8% of revenues, from 7.4% in 2017. Free cash flow generation was slightly down because of this, but remained strong at nearly $31B or 20% of revenues.
The WNO surge in network spending is not new. Webscale network operators (WNOs) invested $63.6B in capital expenditures (capex) in 2017, up 18% from 2016. Since 2011, WNO capex has grown an average of 25% per year. Capital intensity is approaching 8% per year. Some WNOs, including Facebook, have capital intensities in the 15-20% range, similar to telecommunications network operators (TNOs).
R&D spending exceeds capex for most WNOs
Webscale operators spend even more on R&D each year than capex; for the 12 months ended 1Q18, webscale R&D expenses were 10.6% of revenues (Figure 2). That's flat year-over-year, but up from the 8% range of 2011-13. Webscale operators are plowing R&D funds into a broad range of tech projects, in both predictable areas like artificial intelligence and IoT, and less obvious areas like healthcare (Amazon and Google), food delivery (Alibaba), and connected cars/self-driving (Baidu).
Source: MTN Consulting, LLC
Implications for vendors
WNOs self-develop portions of the technology (hardware & software) to run their clouds, working with manufacturers like Quanta and Inventec to manufacture. While that dictates some proprietary technology, most WNOs do lean towards open source, open networking-based solutions when available.
A broad set of vendors are benefiting from the WNO surge, from semiconductor players selling into the data center market (Intel, Nvidia, Broadcom, etc), to optical components & transport vendors selling into data center interconnect markets (Ciena, Infinera, Oclaro, Neophotonics, Lumentum, etc.), to contract manufacturers of white box/OCP servers such as Wistron and Quanta.
Not all vendors have benefited from WNOs, or from the broader the shift in total network capex towards the data center. Non-Chinese vendors of communications infrastructure, such as Ericsson & Nokia, continue to struggle. They benefit only slightly from ZTE’s recent troubles. Huawei may be hit next, though, either with supply chain disruptions of market access restrictions. That could have dramatic implications.
MTN Consulting provides independent research & strategic support to the telecommunications, cloud, and IoT marketplace.
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