Research Note


November 2021


LightCounting publishes Part One of a Research Note on preliminary Q3 2021 results While we normally publish a single Research Note on early financial results each quarter, we are pub-lishing it in two parts this quarter. Part One focuses on ICPs and CSPs, and Part Two on the equipment and components makers that sell networking products to them. Instead of sending humans into space on rocket ships like other tech tycoons, Mark Zuckerberg wants to send billions of them into cyberspace. At Facebook’s Q3 2021 earnings call Zuckerberg went public with his vision for the successor to today’s internet, and where he plans to lead Face-book in the next decade. To underscore the importance of this new corporate direction, Facebook rebranded itself as ‘Meta’ and in Q4 will begin financial reporting for its Facebook Reality Labs separately from its Family of Apps (Facebook, Instagram, Whatsapp). If this sounds like a big, bold, and ambitious plan, it is. And if it sounds expensive, it will be. Face-book said capex for 2022 would reach $29-34 billion compared to $19 billion in 2021, in their words: driven by our investments in data centers, servers, network infrastructure, and office facili-ties, and investment in our AI and ML capabilities. The scale of this increase is illustrated in the figure below showing Facebook’s spending since 2016. All well and good, but how will Facebook benefit from this? The next quote is quite revealing: “Strategically, helping to shape the next platform should also reduce our dependence on deliver-ing our services through competitors. Building the foundational platforms for the metaverse will be a long road... isn't just about building one glasses product. We're building multiple generations of our VR and AR products, as well as a new operating system and development model, a digital commerce platform, content studios, and a [new] social platform.” So it seems, in Zuckerberg’s vision, the Oculus VR headset and its descendants become the suc-cessor to the iPhone, i.e. the subscriber’s gateway to personal communications, shopping, and entertainment services, with Meta enabling and enhancing the experience, and getting a piece of the action at each step along the way. They also said they expect these investments to reduce operating profit by $10 billion in 2021, and to be unprofitable for the next three years. History will judge whether this is visionary or fool-ish. Other items of note from ICPs that have reported on Q3 are numerous records set in revenues, spending, and income, with revenues of the eight companies that have reported growing 24% and spending up 36% compared to Q3 2020. We expect strong growth to continue long-term, some bumps along the way notwithstanding (discussed in the Research Note). Of the few CSPs that have reported, the big three Chinese service providers reported strong rev-enue growth, and others moderate, with aggregate sales for nine Top Tier companies up 5%, and capex up 4% versus Q3 2020. The strong growth in ICP spending and the lackluster capex increases by CSPs has set the stage for the realization of a major milestone in the near future – the point when infrastructure spending by the top 15 ICPs surpasses that of the top 15 CSPs. Part Two of this Research Note will be published next week, and a thorough analysis of the com-plete results for Q3 2021 will be provided to LightCounting clients in the next Quarterly Market Update, to be published in December. LightCounting subscribers can access the full text of this research note by logging into their online accounts.


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