Nowhere to hide spending as accountants peer at the cloud
Tech giants including Microsoft and Meta Platforms published positive quarterly results this week, buoying share prices and offering a little solace to layoff-weary employees. But a closer examination of the published accounts suggests that the spectre of a looming tech recession has not yet faded.
Meta, otherwise known as Facebook, posted profits above investor expectations resulting, presumably, in champagne corks popping in bars off Wall Street as the company’s shares soared (though they remain down on 2021 levels). Google’s parent company Alphabet, meanwhile, also beat revenue and earnings expectations.
Google chief executive Sundar Pichai also promised that the company really did have good AI, it just hasn’t shown it to anybody yet. Indeed, AI got the lion’s share of attention in many of the reports and earnings calls, but sometimes it pays to ignore the shiny watch being swung in front of your eyes and instead look a little bit harder at what the numbers tell you.
Most recently, Amazon published its results on Thursday evening. Shares jumped 10% in after hours trading after the company announced earnings of $127.36 billion, slightly more than the $124.7 billion predicted by analysts. The price rapidly dropped back down, however, as traders dug into the results and found that growth was slowing in Amazon Web Services (AWS) cloud service, seen by many as the company’s most important division. Revenue in Amazon’s AWS unit grew 16% during the first quarter, down from an annual growth rate of 37% seen in the same quarter last year.
The company’s chief financial officer Brian Olsavsky addressed this, saying the company was focussed on long term growth, not quarter-to-quarter results. However, he also noted that squeezing extra juice from businesses was today more difficult than it was during the pandemic era.
“As expected, customers continue to evaluate ways to optimise their cloud spending in response to these tough economic conditions in the first quarter […] we are seeing these optimisations continue into the second quarter with April revenue growth rates about 500 basis points lower than what we saw in Q1.”
This is borne out by results from cloud competitor Microsoft, which also reported largely positive numbers this week but noted that growth from Azure and other Microsoft cloud services slowed to 27% from 31% in the prior quarter.
Lift and shift
Truthfully, neither Amazon’s 16% nor Microsoft’s 27% are growth rates to be sniffed at. Still, slowing growth rates indicate that some thought and authorisation is now required before spinning up instances as businesses attempt to get costs under control. This is interesting precisely because the cloud allowed businesses to continue to spend on IT while masking that very spending by shifting it from the capital expenditure column in the accounts to current expenditure. This, as much as what it allowed businesses to do, was always the cloud’s real selling point.
Today, with all costs under the microscope, the current column is not much of a hiding place. Indeed, recent layoffs at Dropbox were specifically blamed by chief executive Drew Houston on “headwinds from the economic downturn have put pressure on our customers”. It is not just cloud services, either. Overall IT spend is trending downward, with analysts Gartner predicting stagnation in hardware sales and a knock-on effect on revenue in the semiconductor sector.
It is not end times, though. Google’s results reported that its cloud services business was in the black for the first time ever, raking in $7.4 billion, up 27.5% on this time last year. Clearly then, some businesses are continuing to invest. (It should be noted that Google’s accounting categorisation of its cloud revenue includes various consumer services such as Gmail, so the earnings are not reflective of a pure infrastructure as a service (IaaS) offering).
However, what is true is that the pandemic era saw tech spending boom as businesses attempted to get to grips with everything from online marketing to e-commerce to remote working. While a decline is bad for the sector in the short term, getting the spending out of hiding and into the open may yet prove a positive as the cold, hard numbers prove how important IT is to both the top and bottom lines on the balance sheet and, therefore, to the very existence of a business.
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