650 Group Blog
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In conjunction with its recent Rakuten earnings call this week, Rakuten Mobile disclosed some more of its plans. This mobile operator is becoming a telecom vendor. Specifically, it said that “by expanding the Rakuten Communications Platform (RCP) globally, Rakuten aims to evolve from a Japan-headquartered tech company to a global leader in telecom.” We see this as an explicit statement that the company plans to sell its telecom software and related services to operators worldwide. For instance, Rakuten Mobile just announced a partnership with Saudi-based operator, stc. This move pits Rakuten against Microsoft (who just acquired telecom companies and runs a cloud), Oracle (who runs a cloud and made telecom company acquisitions), and the rest of the telecom industry (traditionally Nokia, Ericsson, Huawei, ZTE, Amdocs, Netcracker and others).
In offering RCP to other operators around the world, its unique value, as we see it, is that Rakuten has successfully built an LTE and now a 5G network based on Open RAN. What we find interesting is that the company has developed a significant amount of intellectual property in-house or through technology sharing. In an interview today with Tareq Amin, Rakuten Mobile executive, we asked what technology has been developed in-house by Rakuten. Here’s what we learned.
Some other components are not developed by Rakuten (the radios come to mind), but this is an exciting development. RCP would be delivered as a “private cloud” on the premises of carrier customers (partners). The terminology Rakuten is using for this “private cloud,” is it’s a “pod.” RCP’s plans are a very interesting development in the industry. There is one more thing. Rakuten said it is working with a technology supplier that will sell Rakuten a server card that would allow a combined router and RAN processing function to co-exist on a server. Today, the servers it uses to support its Open RAN radios use an FPGA NIC. These servers can support up to 16 base stations. We see the addition of routing to this card as an extension of the capability – but it means there may be a diminished need for cell site routers.
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Ericsson Capital Markets Day Part Two:
Networks summary: When asked how it took market share (North American has 53% share 2Q20, up 5% vs 2018), management pointed to having made more significant R&D investments in radio than competitors. It cited Dynamic spectrum Sharing and its cost-efficient radio-related ASICs as examples of valuable features to customers. The company expects O-RAN will continue to evolve, with limited uptake starting in 2023. Cited IPR challenges as one challenge. Elsewhere in the presentation, it said it is #1 contributor to 5G standards; we take it that this IPR gives Ericsson leverage to slow ‘O-RAN’ down. Digital Services: The team said the split of Digital services for T4Q 3Q20 as (excluding IPR, consulting, and learning services): • BSS 20% • OSS 25% • Comm services 15% • Packet core 20% • Cloud and NFV infra 10% The Digital Services team has: • addressed 37 of the 45 ‘critical and non-strategic’ projects • revised its BSS strategy, and it is now 5G focused • 75% of its portfolio exposed to growth as of 3Q20 sales • Cloud infrastructure has 200 customers • 5G Cloud core has 80 customers (includes “5G” EPC and 5GC SA contracts). Packet core should grow faster than the others • 5G SA count is now at 30. 5G SA revenues should begin in 2021 from most of these contracts. • BSS has 120 contracts, 9 of which were competitor swap-outs • Orchestration has 100 customers Dig Services software + support in T4Q 3Q20 was about 55% of total revenues, and it expects 60% by 2022. It has about 40% recurring revenue T4Q 3Q20 and expects it to be about 55% by 2022. Expects Japanese and Korean operators to deploy SA by the end of 2021; expects Japanese 5G market to ramp very soon because it is a heavy user of iPhones. It expects 600K 5G base stations in China in 2020 and the same number in 2021. Emerging Markets Summary: Recently acquired Cradlepoint has > 60% GM and a recurring revenue SaaS model. 200K enterprises, 3,000 public agencies, 1,500 channel partners. It has won 30 dedicated network deals.  650 Group attended the company's recent showcase for investors. This blog will be a two part series. Part 1: In Summary: Management lowered Digital Services margin targets due to a revenue miss in 2020 as legacy systems dropped faster than expected, relative to what was communicated to investors a year ago. It expects to grow faster than the “>1% CAGR market forecast” set by industry analysts by taking share, expanding in the enterprise market, growing with IoT opportunity, and through M&A (like Cradlepoint). We see that the company is betting on the enterprise market for growth, and our take on the implied message was Ericsson would make more acquisitions to beef up enterprise exposure. While the company was careful to repeat that it is working with SPs go to market, its recently acquired Cradlepoint acquisition has 1,500 channel partners (mostly not SPs). Financial commentary • Margin targets for the Network group will remain the same in 2022 as in 2020 (by 1% higher than was communicated in 2019) • Margin targets for Digital Services are 4-7% in 2022 vs. 10-12% as communicated in 2019 (lower because legacy is declining faster than expected and because it is increasing R&D commitment to greater levels) • Margin targets for Managed Services are +1% versus year-ago targets • Total margin targets are 12-14%, same as a year ago (on increased networks and Managed Services, offset by Digital Services. |
CHRIS DePUY
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