Digital Infrastructure Monthly Report | May

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• Demands for increased storage capacity, higher bandwidth, and faster transmission speeds do not represent a cyclical trend but are effectively perpetually increasing as info tech becomes an integral part of every aspect of our lives.        
• The 2020 Coronavirus pandemic has greatly accelerated the global economy’s embrace of technology, especially in education, remote work, communication, shopping, transacting and data processing.        
• The shift to 5G represents a significant point in the virtuous cycle of connectivity and use whereby greater bandwidth leads to more app development and more connected devices which in turn generate even more data that can be monetized, thus driving the need for even more capacity.        
• Both China and the US are ramping efforts to accelerate the rollout of 5G and their respective semiconductor ecosystems amid rising wireless and data centre chip demand.

Tematica BITA Digital Infrastructure and Connectivity Index (TBDIGI) Performance

Past performance is no guarantee of future performance. Source: Tematica, BITA *TNR Index, in USD. 12 Month figures based on 30.04.20 - 30.04.21.

Performance Review

Breakdown of Performance

April saw the underlying index of our Digital ETF rise 4.35%, driven largely by Data Networks and Digital Processing names. The top ten contributors to performance for the period represented 25.04% of the index but contributed to approximately 87% of the return while the bottom ten detractors to performance represented 14.33% of the index and contributed to approximately 35% of April’s results.

The top ten contributing names, while representing 4 of all 6 segments showed some concentration in Digital Processing names with Mediatek (2454-TW) [24.92%] and Nvidia (NVDA) [12.45%] combining to account for approximately 41% of index returns. Data Networks names PayPal (PYPL) [8.01%] and Square (SQ) [7.83%] advanced as investors anticipate growth in both networks as PayPal looks to embrace cryptocurrency transactions and Square’s Cash App has quickly become a destination for disillusioned Robinhood traders and others looking for alternatives to traditional brokerages.

All six segments were represented in the top ten detractors to April’s performance, Digital Solutions & IP names Inseego Corp (INSG) [-11.20%], Fastly (FSLY) [-5.07%] continued to sell off after missing EPS estimates in March’s earnings call and, of all things, exceeding estimates, respectively. Intel (INTC) [-10.11%], despite posting good segment growth in some segments saw a decline in Data Centre sales as both units sold and profitability were negatively impacted.

Digital Infrastructure and Connectivity UCITS ETF Performance Table

As of 30.04.2021

Performance before inception is based on back tested data. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product. Source: Tematica / BITA / HANetf. Data as of 30/04/2021

Industry News

U.S. based grocer Kroger announced it is beginning to test drone powered home delivery.[1] While not as impactful as a company like Amazon making similar announcements, Kroger still is the fifth largest retailer in the world. Aside from power, drone networks just don’t function without the network. Another bit of momentum powering us through the virtuous cycle towards increases in both use and capacity of existing digital infrastructure. [1] https://www.supermarketnews.com/technology/kroger-test-grocery-deliveries-drone

Amazon web services (AWS) announced it has launched what it is calling FinSpace, a new data management and analytics service for the financial services industry.[2] While Amazon is not a constituent of the index, these developments and future growth bode well for the infrastructure providers that are.

Microsoft (MSFT) announced this past month that it will be launching a commercial virtual desktop service, meaning that users will not only be able to access Office 365 and other software remotely, but also be able to utilize cloud-based processing power and storage to run those applications. The company also announced they are on pace to build anywhere from 50 to 100 data centres in at least 10 countries in 2021. Again, while not an index component, the news and subsequent investment will lift future earnings of those constituents that are part of the supplier chain for this global project.[3]

Honda Motors (HMC) and Verizon (VZ) announced they are conducting a study on 5G network bandwidth and latency to determine suitability for development of autonomous vehicles.[4] Regardless of the outcome this will be a net positive either for companies involved in the current 5G buildout or the future buildout of the 6G network.

Constituent News

Dell Technologies (DELL) announced it will spin off its 81% stake in VMware (VMW) in a special cash dividend of $11.5-$12 billion to all VMware shareholders.[5]

InterDigital's (IDCC) subsidiaries have renewed their multi-year, worldwide, non-exclusive, royalty-bearing patent license agreement with Sharp Corporation (SHCAY). The agreement, which was set to expire in 2021, will continue to cover Sharp’s sale of its 3G and 4G mobile products. Sharp has been a continuous licensee of InterDigital since 1998, spanning multiple generations of cellular technology.

PayPal (PYPL) announced the launch of crypto on Venmo, a new way for Venmo's more than 70 million customers to buy, hold and sell cryptocurrency directly within the Venmo app.[6] While this is a boon for cryptocurrency advocates, let’s not forget that mainstream adoption of cryptocurrencies speaks not just to advances in payment choices but to the innovations that underpins the digital infrastructure virtuous cycle of incremental use driving demand for greater bandwidth which in turn allows for greater use and so on.

Marvell Technology (MRVL) closed its $10 billion cash and stock acquisition of Inphi (IPHI) and the combined company will use the Marvell name.[7]

March quarter results at Ericsson (ERIC) missed consensus expectations as revenue for the quarter was unchanged YoY. Network sales increased by 15% YoY, and the company shared it sees “strong momentum in the global 5G demand with lead markets moving forward at high pace” even though it now sees 2021 as an “investment year” with Q2 earnings similar to 1Q.[8]

Skyworks (SWSK) reported March quarter revenue that rose 53% year over year and guided its current quarter in the range of $1.075-$1.125 billion, up 46%-53% year over year,[9] while MediaTek (MDTKF) sees another sequential revenue increase of 10%-18% for the current quarter.[10] Helping explain that wireless chipset outlook, as part of its March quarter results, Qualcomm (QCOM) confirmed it sees 450-550 million 5G smartphones shipping in 2021 vs. ~240 million in 2020.[11]

Skyworks also announced its acquisition of the infrastructure and automotive business of Silicon Labs (SLAB), a move that should bolster its market position as 5G technologies enable applications that include the connected and autonomous car as well as the internet of things.[12]

Outlook

The Biden Administration’s $2 trillion infrastructure bill has earmarked $100 billion towards digital infrastructure development. This is a clear signal that this administration is serious about not only developing existing physical infrastructure of the USA, but also building out its digital infrastructure as well. In addition to the USA Federal Government, the individual States are doing their part as well. The State of New York passed legislation mid-April requiring Internet Service Providers (ISPs) to offer qualifying low-income residents broadband service at either a $15 or $20 per month fee. Less than two weeks after passing the bill, five telecom industry lobbying groups filed a lawsuit to reverse or otherwise block the legislation.

The increasing global dependence on the internet coupled with the virtuous cycle of increased storage and processing capability leading to more use and innovative application development is an ongoing process. Upgrade cycles like 5G (and 6G in the next decade) present both short- and long-term opportunities for those companies that provide goods and services to the various segments in the digital infrastructure and connectivity space. Reports suggest “MediaTek has notified its China-based smartphone clients that it will scale down shipments of 4G chips in 2021 due to tight capacities at foundry houses.” This would suggest an accelerated shift to higher priced 5G chipsets and smartphones, which would in turn drive a similar acceleration in product mix shift at Ericsson (ERIC), Nokia (NOK) and others that serve the mobile infrastructure market. That accelerated 5G smartphone shift should also spark interest in the mobile IP licensing businesses at Nokia and InterDigital (IDCC) among others, as does the growing 5G conversation around the connected car and IoT applications.

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