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Rising Interest Rates, Tax Benefits Have Tech Giants Shift Buyback Strategies

2018 US Insurtech Report

Ondeck Now Open To Exploring Deals, CEO Says

Broadband Only Homes Log Record Gains In Q3

4G 5G Densification To Push Global Small Cell Spend To 2 Billion By 2020

Banking & Financial Services
Rising Interest Rates, Tax Benefits Have Tech Giants Shift Buyback Strategies


With interest rates rising and the impacts of federal tax reform taking effect, companies, especially tech giants, have drastically changed their capital allocation strategies

Jul. 13 2018 — After a record-breaking first quarter, stock repurchases in the S&P 500 are set to reach unprecedented heights in 2018. With interest rates rising and many companies flush with cash from tax reform, debt analysts expect to see companies continue to return massive amounts of capital to shareholders while also paying down debt.

According to an analysis of S&P Global Market Intelligence data, the first quarter of 2018 set a new record for quarterly share buybacks with $188.46 billion in common stock repurchases. The previous record for the index, which launched in March 1957, was set in the third quarter of 2007, when repurchases totaled about $172 billion, Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, said in an interview. Leading the index in buybacks during the first three months of 2018 was the information technology sector, with common stock repurchases totaling $63.08 billion, more than twice the amount seen in the year-ago period.

In the past, a number of the heaviest repurchasers — including Apple Inc. and Microsoft Corp. — funded their buybacks not with cash, but rather with debt. This is because prior to tax reform, when interest rates remained low, it made financial sense for certain investment-grade issuers to take on debt domestically while keeping large piles of cash overseas as the interest rates on the debt were significantly lower than the tax rates the companies would have faced for repatriating their cash.

That strategy has now been turned completely on its head as companies simultaneously pay down debt and pay out for enlarged capital return programs, debt analysts said.

The spike in buybacks comes at the same time that the U.S. Federal Reserve is raising its benchmark interest rate. The Federal Open Market Committee recently set a target range for the federal funds rate of 1.75% to 2%, up 25 basis points from the previous level. Moreover, the central bank signaled it may take a faster path on rate hikes this year, with some Fed officials favoring increasing the rate four times in total this year.

"At the end of the day, companies are starting to balance the needs of the two constituents — both equity holders and debt holders. So there will be significant buybacks but for mega caps that had significant amounts of debt … they are also likely to unwind their debt position as well," Andrew Chang, director of S&P Global Ratings services, said in an interview.

In particular, he expects a "significant increase in share repurchases in calendar 2018 and even in 2019 mostly led by the bigger caps such as Apple, Oracle [Corp.] and Cisco [Systems Inc.] — the really large companies who have been parking their cash overseas in lieu of repatriation for many years." He noted that these repurchases will be funded with cash on hand.

"Now that tax reform has passed, companies don't see the need to borrow anymore and they are asking themselves, 'What should we do with all this excess cash?'" Chang said.

The tax overhaul adopted in 2017 not only slashed the corporate tax rate to 21% from 35%, but it also set a 15.5% repatriation rate for cash held overseas. These changes "set the framework for technology companies to support capital returns with internal resources as opposed to issuing incremental debt," Moody's said. While it expects increased capital return programs, including higher dividends and repurchase levels, it predicts "significantly lower debt issuance from large, cash-rich technology firms that had previously issued debt domestically in order to synthetically repatriate funds."

All in all, the firm expects "a general de-leveraging over the next several years" in tandem with elevated capital returns.

Apple is already practicing that strategy. Citing tax reform, the company in May said its board approved a new $100 billion share repurchase authorization as well as a 16% increase in its quarterly dividend. In the first three months of 2018, Apple was the largest repurchaser of stock in the S&P 500. The company said it spent $23.5 billion to repurchase shares of its common stock. An S&P Global Market Intelligence analysis of the company's consolidated cash flow statement puts the total at $22.76 billion. An Apple spokesman declined to comment on the two figures. As of March 31, the company held cash and cash equivalents of $45 billion, short-term investments of $43 billion, long-term investments of $179 billion, balanced against $122 billion of debt.

By comparison, the quarter's second largest repurchaser of stock in the S&P 500 was the biopharmaceutical giant Amgen Inc., which spent $10.70 billion on buybacks. The No. 3 spot went to the technology conglomerate Cisco, which spent $6.21 billion on repurchases.

In addition to buying shares, Cisco issued no debt during its most recently ended quarter and repaid nearly $3.65 billion in debt. Total debt declined $11.25 billion during the period.

Chang called the deleveraging occurring in the IT sector a "natural unwinding of the balance sheet."

Looking ahead, Chang said the elevated levels of repurchases seen in the first quarter will likely continue throughout 2018 and even into 2019 or 2020.

"I would say 2018 will not be the peak — it will be 2019 or even 2020," Chang said, noting the large cash balances tech companies are working through. Rather than a short-lived "big bang," Chang said higher repurchases and repayments will continue over the next couple of years "until that point where the companies have rightsized the balance sheet."

2018 US Insurtech Report


S&P Global Market Intelligence’s 2018 US Insurtech Market Report projects that U.S. private auto insurance premiums written via the direct-to-consumer channel will exceed $90 billion by 2022. The report also examines startup funding trends and identifies other business lines that could be ripe for insurtech disruption.

Nov. 30 2018 — U.S. insurance technology startups are numerous and still very much in their early years. As is common with an emerging fintech segment, investor and public interest in the space is high despite the risky nature of startup investing. The insurtech space had a recent gauge of public investor interest with the IPO of lead aggregator EverQuote. While the IPO priced above its expected range, the stock’s performance since then has been lackluster, a disappointing sign for others looking to go public. But many startups are still many years away from that goal, and there might be more investor appetite for different business models. Unlike Netflix and other companies that have caused wholesale disruption in various industries, many insurtech startups are working with incumbents rather than trying to replace them. Incumbents are avid investors in insurtech companies, and the digital agency model relies heavily, for now at least, on partnerships with established underwriters. Of the different insurtech business models, digital agencies and underwriters continue to attract the most funding and therefore form the focus of our report. Though many facets of their business model are not revolutionary, they have added meaningful innovation in some key areas. Certain business lines appear more ripe for innovation than others. In private auto, for instance, the direct distribution model already has a firm foothold and therefore seems less vulnerable to disruption by startups. S&P Global Market Intelligence projects that premiums written in the direct response channel will exceed $90 billion by 2022 and that they will account for more than 30% of overall U.S. auto premiums. But if the direct model can be applied to other lines, such as small business insurance or life insurance, that might produce a more dramatic challenger to the incumbent writers of those lines.

Early days

Interest in the U.S. insurtech space has spiked in recent years, fed by a large crop of startup companies. It is too early to assess how successful most insurtech startups and their investors will be as many companies are only a few years old at this point. In S&P Global Market Intelligence’s coverage universe, the median age of U.S. insurtech companies — based on the year they were founded — is seven years. But the recent spate of startups is even younger than that. The years 2015 and 2016 were a particularly bountiful time; companies founded in those two years alone account for roughly 22% of the coverage universe.

Appetite for disruption

One of the textbook examples of industry disruption is Netflix, which drastically reshaped the distribution of entertainment, first through its DVD mail service and again through its on-demand streaming service. These changes brought about the demise of in-store video rental giant Blockbuster, which reportedly had the chance to buy Netflix for only $50 million in 2000.

We do not foresee the same kind of seismic changes coming for much of the U.S. insurance industry, since the fundamental distribution model is not changing. The startups covered in this report — both digital agents and fullstack companies — are proponents of the direct distribution model, selling policies directly to consumers via their websites and/or mobile apps. But this is far from a novel concept. Areas of the insurance industry have embraced online, direct-to-consumer distribution for some time.

S&P Global Market Intelligence client? Click here to login and read the full 2018 US Insurtech Market Report

The projections reflect various assumptions regarding premiums, losses and expenses. They are a product of a sum-of-the-parts analysis of individual business lines that is informed by third-party macroeconomic forecasts, historical trends and recent market observations that include first-quarter 2017 statutory results and anecdotal commentary about market conditions. Projected results are displayed on a total-filed basis and are not intended for application to individual states, regions or companies. S&P Global Market Intelligence reserves the right to update the projections at any time for any reason.

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Ondeck Now Open To Exploring Deals, CEO Says


OnDeck has never done an acquisition, but M&A is a possibility now that the company is generating cash, Chairman and CEO Noah Breslow said.

Breslow expects there to be consolidation across online lending companies in the near future.

OnDeck plans to launch a new product line, such as a business credit card or an equipment financing product, by year-end.

Nov. 30 2018 — Noah Breslow has been at the helm of On Deck Capital Inc. since June 2012, overseeing the company's initial public offering and several profitable quarters. The online lender has originated more than $10 billion in small-business loans and is one of the largest players in the industry.

In addition to originating its own loans, OnDeck recently launched ODX, a new subsidiary focused on a platform-as-a-service product for banks. OnDeck has operated that sort of white-label partnership with JPMorgan Chase & Co. for several years and will launchoperations with PNC Financial Services Group Inc. in 2019.

Now, the lender is open to doing deals, Breslow said. He sat down with S&P Global Market Intelligence in Las Vegas to talk about his company's future product plans and the broader online lending marketplace.

The following is an edited transcript of that conversation.

OnDeck CEO Noah Breslow
Source: OnDeck

S&P Global Market Intelligence: How do you view the current state of the online lending marketplace?

Noah Breslow: What you're seeing in that market is a bit of survival of the fittest. Many smaller companies are probably going to be sold in the next couple of years.

The advantages in the business go to those with scale: You can raise capital on the best terms, you collect the most data, so you can make the best decisions when you build your models, and you can reach more small-business owners more efficiently.

That being said, do you foresee being an acquirer?

We're open to it. We haven't acquired a company in 11 years of doing business. One of the advantages of now being profitable and generating cash is we can look around the market.

But we're designing our core business model so we don't need to acquire to hit our targets. Anything we do in the M&A sphere will be additive, and it will not be aggressive M&A. It's going to be reasonable bets to have a nice return or nice synergies, if we do it.

Is OnDeck considering starting other products outside of small business lending?

Not at this time. We focus on trying to be the best small-business lender in the world, but that can mean a lot of different products over time.

Today we have a term loan and a line of credit product. We've talked about four other products that our customers use: equipment financing, invoice factoring, Small Business Administration lending and small-business credit cards. Those are all fair game for us over the next couple of years.

We're on track to announce our third major product by the end of the year. One of those four will probably be picked.

Why is OnDeck focusing on small business lending rather than other offerings?

It's where underwriting is not commoditized. Student lending and personal lending are based on FICO. You can go to 10 different websites and get identical products.

In small business lending, the intellectual property around the OnDeck score is unique.

I like being able to differentiate in that way. It creates a sustainable advantage for our business, whereas if we were just using FICO to underwrite, anyone can buy that and get into the market.

OnDeck's white-label product lets banks use its technology to streamline their own lending process. In those partnerships, do you face regulatory restrictions with the use of alternative data in underwriting models?

When we're partnering with banks, it's critical that the bank has a lot of control over the credit model and the data being used for decisioning.

The model we use with JPMorgan Chase was jointly developed between OnDeck and Chase, so obviously Chase was very comfortable data. The model we're using with PNC is more of PNC's design, and we're advising on its creation. In both cases, we're using data that's right down the middle of the fairway — business credit, business cash flow and evaluating the business owner — but nothing too esoteric.

In our own business at OnDeck, we can use more alternate data because we don't have the same modeled governance that a bank might have.

Are you using machine learning to synthesize data sources and create new models based on alternative data?

Some players out there have tried to go purely digital and almost let the computer decide how to make the decision. We don't believe in that.

We have a hybrid model, where people with a lot of commercial underwriting experience are working in concert with advanced modeling techniques to get the result.

OnDeck's charge-off rates have declined year over year in 2018. Is there correlation between these lower rates and your updated models using more alternative data?

Our credit models have improved over the last year, and alternative data definitely contributes.

Many of our improvements in the last year have been structural or operational. I view the modeling improvements as even more upside potential from here.

We noticed after we loaned our first billion dollars that our credit models got a step-function better. Now, with $10 billion under our belts, it's again happening. We can do a lot of data-driven decision-making about who we approve and who we decline on many years of history now.

It starts to become more powerful. That's why you see these scaled-up companies like American Express or Discover Financial or Capital One. They're reaping the benefits of decades of lending, and hopefully we'll be in the same place.

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Technology, Media & Telecom
Broadband Only Homes Log Record Gains In Q3


23% of wireline broadband households did not subscribe to traditional multichannel in the third quarter.

Nov. 29 2018 — The segment of U.S. broadband households not subscribing to traditional multichannel soared in the third quarter, with its ranks swelling sequentially by 1.2 million. This is the household subset's largest quarterly gain since we began tracking the metric.

Kagan estimates 23% of broadband households serviced by either cable or telco did not subscribe to legacy multichannel at the end of the third quarter, up 8.5 percentage points in the last three years.

The streaming plebiscite is reverberating virtually through the entire media and telecommunications universe, as underscored by the following select year-to-date, as of Sept. 30, domestic metrics:

  • Traditional multichannel subscribers, - 2.8 million, including a 1.1 million drop in Q3 alone.
  • Virtual multichannel customers, +2.1 million.
  • Wireline broadband subscriptions, +2.0 million.
  • Netflix Inc. paid subscribers, +4.1 million.

The feedback loop that has led to the streaming revolution is now spinning full speed, compelling venerable media and telecommunications household names such as AT&T, Comcast and Walt Disney to embrace, or at least take steps toward, over-the-top video.

With Disney's direct-to-consumer service slated for a launch in 2019, talks of a Netflix-competitorrollout by AT&T the same year and the rumored Comcast streaming device potentially not far behind, our year-ahead segment forecast could prove quite conservative in about 13 months.

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Top US ISPs Expand Gigabit Internet Availability To 49 States

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5-Year Virtual Multichannel Revenue Forecast Underscores Segment's Opportunities

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Technology, Media & Telecom
4G 5G Densification To Push Global Small Cell Spend To 2 Billion By 2020


In 2023/2024, emerging markets will begin to see volume small cell deployments.

Nov. 19 2018 — Global mobile operators are expected to rely heavily on small cells to dramatically improve network coverage in indoor locations, select metro areas, suburbs and rural and remote locations over the next five years. According to new research from Kagan, global small cell revenues are expected to grow to $2.4 billion in 2020, as mobile operators and enterprises look to improve the coverage of both 4G LTE and 5G networks in both indoor and outdoor environments.

Total combined indoor and outdoor small cell revenue is expected to reach a peak in 2022, before declining in 2023 and 2024. Our expectation is that the bulk of initial small cell rollouts for 4G LTE and 5G densification will be complete by 2022, particularly those deployments throughout EMEA designed to enhance coverage and capacity for 4G LTE networks. We do expect a slight decline in revenue in 2019 as pricing on indoor small cell units decreases due to volume shipments. In 2023 and 2024, more emerging markets in CALA and Africa will begin to see volume small cell deployments. However, those deployments will be on a smaller scale when compared with larger markets, including the U.S., China, India and those of Western Europe.

Small cells are low-power radio access points designed to complement and enhance existing macrocell locations. They can operate in both licensed and unlicensed spectrum bands and be deployed both indoors and outdoors and with multiple form factors. The largest of these devices are typically used in urban and rural outdoor locations and the smallest are reserved for indoor residential applications.
There are three primary types of small cells:

  • Femtocells: small footprint, low-power devices designed to improve coverage in homes and small businesses. Femtocells can improve coverage gaps indoors, especially when signals originating from outdoor macrocells are unable to penetrate walls. Current femtocells support anywhere from four to eight mobile devices and have a range of 50 feet or less.
  • Picocells: base stations designed to cover a small area of around 700 feet or less. Picocells can be deployed both indoors and outdoors, with most being deployed indoors in shopping malls office complexes and train stations to add network capacity. Outdoor locations include stadiums and urban areas to improve network capacity and coverage. 
  • Microcells: typically have a range of around three miles, compared with macrocells, which have an average range of 22 miles. Microcells are used to add network capacity and coverage in outdoor locations, including dense urban areas, as well as rural and remote areas.

This summary is from Kagan’s first article providing in-depth global coverage of mobile infrastructure technologies. It includes worldwide small cell locations by region, revenue and units forecast through 2024. Following this will be an article covering global distributed antenna systems, or DAS, also with forecasts through 2024.

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