Thoughts and Takeaways Datatimes, July 31, 2020: Earnings

EQUITY RESEARCH INDUSTRY UPDATE

July 31, 2020

Datatimes, July 31, 2020: Earnings

CLOUD AND COMMUNICATIONS

Thoughts and Takeaways

Traffic Volumes Drive Demand for Critical Infrastructure

SUMMARY

Record traffic is a consistent theme across our coverage as CDNs, wireless carriers, cable, datacenters and towers report earnings. Although traffic will normalize, we do think COVID-19 has accelerated long-term secular trends that will increase dependence on high capacity, low latency networks to enable higher levels of work from home, OTT video/gaming, eCommerce and more. AKAM beat our Street-high estimates and management believes that strong volume growth can persist; the return of live events and higher levels of cord-cutting could support this. EQIX reported a solid quarter but revenue growth has been slower; long term, EQIX's interconnected assets are well-positioned to support the world's largest networks. CMCSA's wireline business was strong, and will likely continue to see strong demand as broadband demand remains elevated; video sub losses were in line but weak, and we worry that cord cutting could accelerate in a recession, which in turn drives demand for highquality networks.

KEY POINTS

AWS Reports Revenue Growth of 29% Y/Y: AWS revenue growth was 29%, vs. our 32% estimate. Positively, EBIT margins were 31%, 100 bps higher than our estimates. After Azure and AWS missed our growth estimates, we do think that cloud growth is starting to see pressures as enterprises scrutinize IT budgets in the face of macro uncertainty. We are concerned that cloud growth could miss Street estimates in the short run. Positively, we believe cloud is a game-changing technology that will drive innovations in every industry. Cloud growth is still in the very early innings and both AWS and Azure are well-positioned.

CCI/AMT Report Mixed Earnings, But Set Up for a Strong 2021: Both tower companies reported solid organic growth. CCI/AMT AFFO yield spread vs the treasury is above averages, which support valuations. We're seeing some macro tower delays from T-Mobile as it prioritizes upgrades in urban areas. AMT slightly reduced FY20 guidance and CCI affirmed guidance, but both could see better growth in 2H20 with 5G and TMUS.

Rackspace an Important Multi-Cloud Partner, Announces IPO Terms: The company plans to raise ~$700M in net proceeds, with a ~$5B market cap. Rackspace is offering 33.5M shares at a price range between $21 and $24, Rackspace refocused its efforts around managed services, helping customers design, build and operate multi-cloud environments . We view Rackspace as a unique cloud ecosystem partner. Additional notes on page 2.

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Questions & Thoughts

How to invest in Strong Cloud Volume/Applications Growth? We see Fastly, Cogent, Vonage, Digital Turbine and Kalyera set to outperform quarterly expectations.

Is the tower revenue shortfall in the quarterly Cyclical or Secular? Cyclical.

Rackspace Files IPO Paperwork, Important Cloud Ecosystem Enabler: Rackspace has refocused its efforts around managed services, helping customers design, build and operate multi-cloud environments mostly on AWS's and Azure's infrastructure. Rackspace is cloud/technology-agnostic, which is important for businesses looking for a trusted managed service provider. Rackspace is also supporting multi-cloud deployments, which could help enterprises avoid cloud vendor lock-in, Bottom line is that Rackspace is an important member of the cloud partner ecosystem, which needs to develop in order to encourage enterprise cloud adoption. Additional notes from the S1: Leading end-to-end multi-cloud technology platform, serving 120K customers in 120 different

countries. The company serves customers in two segments; Multicloud services and Apps & Cross Platorm.

Multicloud Services segment includes public and private cloud managed services offerings, as well as professional services related to designing and building multicloud solutions and cloudnative applications.

Apps & Cross Platform segment includes managed applications, managed security and data services, as well as professional services related to designing and implementing application, security and data services.

Over the last eight years, Rackspace has invested over $1B and 12M hours to develop a set of over 200 technology tools for customers to enhance their IT.

For 2019, Rackspace had revenue of $2,438.1M, a net loss of $102.3M, Adj.EBITDA of $742.8M and adjusted net income of $62.4M. Revenue growth was flat from 2018 and gross margins in the high 30% range, with capex intensity around 8-14%.

Rackspace focused on delivering a "Fanatical Experience," helping customers on strategic outcomes by leveraging its technology partners and unparalleled service (6,800 employees and 2,500 certified cloud professional).

The company has made recent acquisition to strengthen its products and services, including TriCore in June 2017, Datapipe in November 2017, RelationEdge in May 2018, and Onica in November 2019.

Rackspace acquired Datapipe for ~$1B. Datapipe is a provider of managed services across public and private clouds, managed hosting and colocation.

Rackspace believes we are in the "modern era" of cloud adoption. Today, businesses are adopting cloud-native principles, embracing agile techniques and adapting their business practices to maximize the benefits of the modern cloud. In addition, more businesses are turning to multicloud solutions to match individual workloads with the best cloud technology stack and the best deployment model; in the Gartner Multicloud: Why It Matters report, "81% of survey respondents who use public cloud were currently working with two or more external public service providers."

Large market opportunity represents the magnitude of cloud. According to the Gartner Forecast: IT Services, Worldwide, 2018-2024, 2Q20 Update, the managed services and cloud infrastructure services market worldwide is estimated to be $410 billion in 2020 and is expected to grow 7% annually to $502 billion in 2023.

Highlighted Oppenheimer Reports

VZ 2Q20 Follow-Up: Solid Wireless Adds on Demand for Quality, 5G Progressing Well. Verizon delivered a slight revenue miss on lower equipment sales, $30.4B vs our $30.7B est. Postpaid phone net

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additions easily beat consensus, which we and VZ believe is driven by its high-quality network, and good subscriber growth continues in July. With more people relying on wireless communication for the primary work communications network, voice quality, speed, consistency, and coverage matter more than ever. Verizon does win on every one of these categories. Positively, COVID-19 had a minimal impact on 5G buildouts; VZ will meet its 2020 network targets. 5G trials (DSS/fixed) are going well. The focus is to accelerate 5G ultra-wideband deployments from 35 cities to 60 by year-end as more 5G-compatible devices launch in 2H20. Note Here

AKAM 2Q20: Strong Quarter Beating Our Street-High Estimates, Guidance Conservative but LT Well Positioned. AKAM reported a robust second quarter, beating our Street-high revenue/adj.EBITDA estimates by 130/590 bps. Cloud security revenues grew 27% and this is now a $1B run-rate business (contributing 33% of revenue vs. 29% in 2Q19). AKAM is helped by very strong OTT gaming and video volumes, 3Q20 will see some seasonal headwinds and $20 million or so in one-time sequential pressure but 4Q20 should be very strong, driven by record -high eCommerce/OTT/Security volumes. AKAM's evolution into a cloud security company has been impressive. Cloud security could reach 40% of mix by 2022. AKAM's security products leverage its CDN/edge infrastructure, driving up overall margins. Note here.

EQIX 2Q20: Fundamentals Solid, Interconnection Growth Should Trend in MId-Teens. EQIX reported an in-line second quarter with 8% organic revenue growth and AFFO growth of 12%. Bookings and pricing remain solid, with record network volume growth and customer bookings. Churn has remained stable but is a risk. Interconnection revenues grew 16% organically, which was very strong and indicative of the linchpin of hybrid/multi-cloud interconnectivity that EQIX has become. Importantly, interconnection is now a $1B run-rate business, growing 15%+ per year with high incremental (~80% by our estimate) margins. We think interconnectivity can support 10% AFFO growth (contribute $125M per year on a $2B base), with future M&A and new products (security, NFV) and organic growth driving double-digit AFFO growth. Relative AFFO yield vs. the 10-Year remains attractive. Note here.

CMCSA 2Q20 Follow-Up: Solid Quarter Beat Our Estimates, Business Trajectory Improving: Comcast reported better than expected 2Q20 results on both top and bottom line. We're slightly lifting estimates on a sooner than expected media recovery and effective cost control. Positively, broadband net additions were strong, but this was offset by video losses accelerating. Cable revenue growth was slightly weak, but saw an impact from RSN fee adjustments and management expects FY20 Cable margins will expand 100bps from 50bps guided previously. Theme parks are returning at a slower pace and should improve throughout the year. With theaters shut down and limited new content, film will still be weak. The partnership with AMC highlights our thesis that most content will eventually shift to OTT platforms and Comcast can capture new viewers. Note Here

EGHT FY1Q21: Unique Cloud Platform Now in Place, Go to Market Catching Up, Reiterate Outperform. EGHT reported a solid June quarter with revenue in line with our Street-high estimate and margins better than expected. We maintain our Outperform rating and $29 PT; the company is set to for strong momentum. Three important trends should help support continued momentum: 1) achieving success up-market with increased enterprise sales; 2) improving profitability and FCF generation; and 3) monetizing cross-sell opportunity among UCaaS/CCaaS/CPaaS products. The company has built a unique cloud platform that is capable of supporting collaboration/communications of enterprises and flexible enough to support self-provisioning SMB customers. EGHT reported solid bookings growth of 33%, driven by the channel program, which is only in its 2nd inning of deployment. The company should be FCF-positive in FY22, without needing to raise more capital. Note here.

CCI 2Q20 Follow-Up: Conference Call Focused on Fiber Investments, Which Management Clearly Believes In. Consolidated 2Q revenue was down 0.5% Y/Y to $1.44B vs. our $1.46B est. and organic site rental revenues were in line, growing 5.6% Y/Y. CCI provided disclosures on its fiber and small cell investment strategy, which grew at a clip similar to 1Q20. We believe small cell growth will be strong LT as CCI's customers densify 4G networks and expand their 5G deployments, but the timing of improvement could be delayed until 2021 as TMUS focuses on macro urban upgrades and VZ on its fiber builds. Management reaffirmed guidance, implying a strong revenue/adj. EBITDA ramp in 2H20. Positively, the stock remains relatively inexpensive versus 10 Year Treasuries, trading at a 3.5% spread vs its historical 2.5% spread. Note here.

AMT 2Q20 Follow-Up: Organic Growth In Line, But TMobile Merger and India to Lower Growth. AMT reported 2Q20 consolidated organic revenue growth of 5.0%, in line with expectations. Management lowered FY20 guidance for revenue, EBITDA and net income, including $75M in bad debt expenses India/Africa. New T-Mobile is still ramping its network buildout, lowered guidance reflects this. We still believe there are tailwinds with 5G builds accelerating in 2021. We expect TMUS, DISH and potentially cable companies will accelerate builds for fundamental and regulatory reasons. Positively, interest rates are at historic lows and there is little appetite by the Fed to raise rates and its FCF yield

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remains at a relative high versus treasuries. Positively, AMT's spread vs. the 10 year treasury is 2.5% vs. its historical 2% range. Note here.

Major News

Comcast's NBCUniversal and AMC Strike an Agreement for Exhibition of Universal Films: On July 28, 2020, Universal and AMC announced an agreement that the theatrical window for films will shorten to 17 days from the current 75. Universal studios will then have the option to make its films available across premium video on demand platforms, including AMC Theatres On Demand. Terms for the agreement weren't made public, but AMC gets a share of revenue new Universal movies earn from online rentals purchased on other platforms (Apple TV, Amazon), according to sources cited by the WSJ. OPCO: Positively, the agreement resolves the dispute between both companies and gives NBC greater flexibility to distribute theatrical content via OTT.

Microsoft Announces New Cloud Deal With PepsiCo: On July 27, 2020, MSFT announced that it has signed a 5-year partnership that establishes MSFT as the preferred cloud provider to accelerate PepsiCo's infrastructure, ERP, and data estate. In addition, PepsiCo will roll out Microsoft 365 and Teams to its 270,000 employees globally. PepsiCo expects that migrating to the cloud will help drive improving operational performance and innovation. OPCO: Another larger enterprise win for the number one hybrid cloud platform.

AT&T Launches 5G Nationwide, Plans to Shut Down 3G Network: On July 24, 2020 AT&T had launched its 5G network nationwide using sub-6GHz and mmWave spectrum. As expected, AT&T officially notified existing customers via e-mail and text that it's shutting off its 3G network in early 2022. Only 4G wireless devices that support HD Voice and 5G devices won't be impacted. About 7% of AT&T's postpaid subscribers were using 3G handsets. OPCO: By shutting down the 3G network, T can redeploy spectrum currently used for 3G services for incremental network capacity on its 4G LTE and 5G network.

Microsoft Seeing Early Success With Hydrogen-Powered Datacenters: On July 27, 2020, MSFT announced that it successfully used hydrogen fuel cells to power a row of datacenter servers for 48 consecutive hours. Replacing diesel fuel in datacenters with hydrogen fuel cells are an important step in order for MSFT to reach its commitment to be carbon negative by 2030.

Microsoft Working on "Cloud PC" Service: On July 27, 2020, ComputerWorld highlighted a recent MSFT job posting that mentions a new windows-as-a-service product. The new service will likely build on top of MSFT's Windows Virtualized Desktop, but a key difference is a flat-per-user subscription pricing model vs. a usage-based model. Details are few at this point, but industry analysts think MSFT could launch this new service by Spring 2021.

CenturyLink Wins State of Arizona Network Contract: On July 28, 2020, CTL announced that it won a contract with Arizona to provide network connectivity and managed IT services for the state's government agencies. The contract is an expanded version of a previous contract with Arizona, but this focuses more on cloud-based services and provides WiFi, security, unified voice communications, and other networking services for five years. OPCO: Municipalities are recognizing that they must upgrade their network connectivity infrastructure to deliver services to residents more efficiently during COVID.

Ericsson Delivers First US-Manufactured Commercial 5G Base Station to Verizon: On July, 28, 2020 VZ was the first recipient of Ericsson's 5G base station made in its smart factory in Texas. The equipment is the first 5G base station produced by Ericsson in the US and includes all radio access components housed in one container. Ericsson's factory will be fully operational by the end of the year. OPCO: This is a milestone for mmWave/small cell 5G deployments in the US and is key for providing extra capacity alongside sites in metropolitan areas.

Boingo Wireless Selected by a Major League Soccer (MLS) Team to Wire Stadium: On July 30, 2020, WIFI announced that it will design, install, operate and maintain neutral host cellular DAS and WiFi 6 networks at a new MLS stadium under construction in Austin, TX. The new stadium will be home to Austin FC and is scheduled to open in Spring 2021.

Blockchain News and Updates

Oracle Blockchain Services Seeing Increasing Usage: On July 23, 2020, ORCL announced new updates to its Blockchain platform to promote Scalability and quicker deployments for enterprises. ORCL is seeing more customers "increasingly" moving blockchain applications into production, which is forcing

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the company to upgrade its service and capacity. ORCL is also tweaking its pricing for more granular, changing on an OCPU-hour plus storage metric. Crypto Exchange's Nasdaq Listing: Diginex, a company set for a NASDAQ listing, has launched its new Equos digital asset exchange for crypto spot trading with plans for futures and options. OPCO: Since Diginex will trade publicly, this will mark the first crypto exchange listed on a major public stock exchange, through its parent company, Diginex Fidelity Digital Assets Releases Bitcoin Report: The subsidiary of Fidelity released a new report denoting BTC as an aspirational store of value and an insurance policy against a trouble financial system per Cointelegraph. OPCO: FDA's parent Fidelity holds over $8T in assets. Curve Reaches Record Volume: Decentralized stablecoin exchange Curve's volumes topped $60M in daily volume per Cointelegraph. OPCO: Volumes are up 50x in two months as people flock to decentralized exchanges. Research Supported by Delphi Digital

Other Items of Interest

Vodafone Plans to Separate and IPO European Tower Assets: On July 24, 2020, Vodafone says it is on track for its Vantage Towers IPO in early 2021. Vodafone announced the separation of some of its European tower assets in July 2019 and the assets have been operating as a separate entity since May 2020. Vodafone also announced the creation of a new Greek tower infrastructure company through merger with Wind Hellas' tower assets. OPCO: Divesting infrastructure assets fits our horizontal segmentation thesis where share infrastructure assets have higher ROI. First Rounds of CBRS Signals Strong Appetite for Spectrum: During the week of July 27, 2020, the first few rounds for the CBRS auction concluded with gross proceeds totaling more than $550M or $0.031578 MHz/PoP. This outpaces the aggregate reserve price set for the spectrum of about 5x, which was $107.9M net of bidding credits. The band will be helpful for operators lacking mid-band spectrum and for enterprises deploying private wireless networks, both positive for towers. Digital Realty Partners with Nvidia on AI/ML: On July 28, 2020, DLR announced that it will launch a joint deployment of Nvidia's DGX servers in an Interxion datacenter. The service will be available to customers, and hope to provide more accurate AI/ML technology than cloud environments where virtualization can bog down AI/ML workloads. PayPal's Processed Payments Increased 30% Y/Y in 2Q20: On July 29, 2020, PayPal reported strong earnings and usage of its payment platform, suggesting that consumer spending is strong even with significant store closures. Importantly, we believe COVID-19 is accelerating the shift of commerce online, which is positive for cloud and CDNs. Senate Introduces $6.5B Rural Broadband Subsidy Bill: On July 27, 2020, it was reported that the Senate submitted the "Developing Economic Prosperity and Linking Our Youth through Broadband Act" (DEPLOY Broadband Act) which provides $6.5B in emergency funding to the FCC to expand broadband services in unserved and rural areas. The COVID-19 pandemic has highlighted that more wireless infrastructure is needed in rural areas lacking broadband. Cloudflare Launches Serverless Platform: On July 27, 2020, NET launched its serverless platform, Workers Unbound, in private beta. The new serverless will help developers and users outsource infrastructure provisioning and management at the edge to NET. The new servereless will improve latency and is lower priced than cloud offerings. Cloudflare Workers Unbound can be 75% percent less expensive than AWS Lambda, 24 percent less expensive than Microsoft Azure Functions, and 52 percent less expensive than Google Cloud Functions. Google Cloud and Orange Ink New Partnership: On July 28, 2020, GCP and Orange announced a new partnership that includes using GCP's ML/AI platform to improve Orange's cybersecurity efforts. Also, the partnership focuses on building an innovation lab for creating new products and services at the edge The lab will provide training in data, AI and cloud services for thousands of Orange employees. Google Expands its Sub-Sea Fiber Footprint: On July 28, 2020, Google announced that it plans to lay 4,000 miles of new sub-sea fiber cable between the U.S., U.K. and Spain. The project is expected to complete in 2022 and it will help connect the cloud data center Google is currently building in Madrid to the rest of its cloud infrastructure. The fiber cable provides up to 350 TB/second of capacity, the equivalent of 17.5 million people streaming 4K video simultaneously. Google has been more aggressive deploying and financing its own fiber infrastructure.

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