February 8th, 2021

Author

Bruce Liu

Facebook Seeing Advertising Recovery and Early Success in Virtual Reality

Facebook delivered an excellent operating result in the December quarter, growing revenue by 33% thanks to the continued recovery of the advertising business, and generated a remarkable 45.5% operating margin. Outside of the core advertising business, the successful launch of virtual reality headset Oculus 2 drove its non-advertising revenue to a record $885 million, a 156% growth compared to the last year.

Overall, we think this is one of the best earnings calls from Facebook. The team lays out its vision clearly around communities, private messaging, commerce, and the next computing platform. The company is now trading at 12x EV/EBITDA, an astonishing 40% discount compared to Apple.

"Other revenue was $885 million, up 156% due to strong Quest 2 holiday sales. We've been encouraged by the positive perception of Quest 2 since its October launch. We launched Quest 2 in October, and it is on track to be the first mainstream virtual reality headset. We designed it so that anyone could jump in with the best and most immersive experience out there. And at a price that makes it available to as many people as possible. And I think that Facebook has done more than any other company to help bring virtual reality to the mainstream." -- Mark Elliot Zuckerberg, Facebook CEO

Facebook is pushing virtual reality to the mainstream

Skyworks Massively Beat Its Revenue Projection

Skyworks' December quarter revenue was 40%+ higher than their initial outlook offered three months ago. You don't see revenue beat at this magnitude very often in semiconductors. On the other hand, we can't help wondering how the management team can be off its revenue projection this much.

The biggest driver is the 5G iPhone launch, with Apple contributing 70% of total revenue this quarter. 5G smartphone shipment is expected to more than double in 2021, while more applications outside smartphones are also emerging. 5G adoption is still in the earning innings, but the RF content increase is already driving a huge inflection point in Skyworks' revenue growth.

5G driven RF content growth in full swing

Microsoft Became the Largest Cloud Security Company

The install base of Azure Enterprise Mobility & Security (EMS, Microsoft's security offering) has reached 163 million seats. The security business has surpassed $10 billion in revenue over the past 12 months, up more than 40%.

"The recent SolarWinds attack is a stark reminder of how critical security is to our customers. We are focused on ensuring organizations deploy and maintain a zero-trust architecture." Satya Nadella, CEO

Microsoft Became the Larget Cloud Security Company

Another Quarter of "Boring" Execution by AMD

Business success is usually the result of brilliant ideas plus boring execution. AMD has made a public statement in the past that one of the primary goals is to establish a "boring execution," targeting a steady and predictable cadence of product launches and a steady improvement of financial performance.

The company delivered just that in the past few quarters. Over a turbulent 2020, AMD delivered 45% revenue growth driven by continued share gain in the PC and Server CPU market, doubling its revenue from just three years ago.

AMD Revenue by Segment ($ Million)

The U.S. 5G Deployment Update

T-Mobile cited some independent studies to claim the crown of the fastest 5G network provider in the country. Now T-Mobile's 5G network reaches 280 million people; more importantly, its Ultra Capacity 5G, supported by mid-band (2.5 GHz) and mmWave spectrum, covers 106 million people, 50x more than Verizon covers with Ultra Wideband.

Verizon, on the other hand, surprised us by NOT materially increasing Capex in 2021 to support more aggressive 5G deployment, likely due to heavy spending on the C-Band spectrum. Here are the rationales in their own words,

"Our consolidated capital spend for full-year 2021 is expected to be between $17.5 billion and $18.5 billion, consistent with the prior year and within our normal capital intensity range." - Matthew Ellis, Verizon CFO
"we will only increase CapEx if we find something that has a really good return on investment. And then we'll come back and talk about it. Right now, we have everything that we need to execute the plans that we have in front of us." - Hans Vestberg, Verizon CEO

T-Mobile Leading in Post-Paid Phone Net Adds ('000)

Verizon Capex Spending ($, Billion)

Cloud: Looking Beyond Topline Growth

The revenue growth tells part of the story. As the digital transformation becomes inevitable, businesses are rushing to sign up for long-term contracts with cloud giants. Case in point, AWS backlog was up 69% to $50 billion; Google Cloud backlog tripled from $10 to $30 billion in the latest quarter.

“On the backlog number, it’s at about $50 billion at the end of the year, the balance and that’s up about 68% year-over-year. we’re really encouraged by just general large enterprise business adoption is continuing to do well as they are choosing AWS as a tech provider and speeding up innovations.” - Dave Fildes, Director, Investor Relations of Amazon
“Our backlog grew to nearly $30 billion, up from $19 billion in Q3, nearly tripled from 2019 to 2020. Although increases in backlog do not directly correlate to revenue trends, the growth in backlog demonstrates the success Google Cloud is having with large enterprises, which are signing meaningful long-term commitment agreements.” - Ruth Porat, SVP & CFO of Alphabet

Public Cloud Backlog ($,Billion)

Qualcomm's Diversification Outside of Smartphones

Qualcomm is often viewed as a smartphone processor company. However, the non-handset part of the business, including RF front end, IoT, and Auto, now contributes close to 40% of the total revenue and grows faster.

“Leadership in developing the products necessary to implement 5G technology and leadership in enabling the industry to rapidly implement 5G seamlessly worldwide. This process continues through the successive releases of 5G currently under development as our foundational innovations, coupled with our ability to implement 5G in products and coordinated deployment in new verticals continues to drive progress outside the handset industry.” - Steven M. Mollenkopf, Qualcomm CEO

Qualcomm LTM Revenue ($M)

Is AMZL Growth Under-Appreciated?

Amazon's third-party seller services, aka Amazon Logistics (AMZL), have had accelerated revenue growth eight quarters in a row, fueled by strong eCommerce demand and Primer One Day's success. In the fourth quarter of 2020, the revenue reached $27.3 billion with YoY growth of 54%. Amazon has not been shy of spending big bucks on building its logistics network. The square footage of Amazon fulfillment expanded 50% in 2020. The logistics-related Capex also increased more than 100% to $16.4 billion.

"We finished the year (2020) where now more than half our packages, both U.S. and worldwide, are handled through AMZL...And so we'll look to expand and continue to build on that with our AMZL offerings." Dave Fildes, Director of Investor Relations