Microsoft (MSFT) and Alphabet (GOOGL) confirm fears that the economy is not doing well.
The two tech giants kicked off the big tech earnings season on Oct. 25 by sending red flags about the current downturn.
Their warnings can be summed up in one sentence: the health of the economy is not good and it will not improve in the coming months.
Both companies are multinationals and sell their products and services to consumers, businesses and governments alike. They are therefore well placed to provide an accurate diagnosis of the state of the economy.
They have a combined $3.235 trillion market value, as Microsoft is the world’s third largest company and Alphabet is the world’s fourth largest firm. Apple (AAPL) is the world’s largest company followed by oil giant Saudi Aramco.
Results from Alphabet and Microsoft show that both businesses and consumers have reduced their spending.
Less Ad Revenue
The worst news came from Alphabet, the parent company of Google and YouTube.
“Compared to the past, there’s more uncertainties as we go through,” CEO Sundar Pichai told analysts during the earnings’ call.
Alphabet has indeed confirmed that inflation, the main threat to the economy, and the interest rate hikes to combat it are affecting the online advertising sector, the main source of income for Google Services, which includes products and services such as ads, Android, Chrome, hardware, Google Maps, Google Play, Search, and YouTube.
Google Services generates revenues primarily from advertising; sales of apps and in-app purchases, digital content products, and hardware; and fees received for subscription-based products such as YouTube Premium and YouTube TV.
Alphabet’s revenue rose 6% to $69.09 billion in the third quarter from a year earlier. This is below the $70.58 billion expected by analysts. In the third quarter of 2021, they had increased by 41%.
The increase in revenues during the past quarter is one of the weakest since 2013 if we exclude the start of the pandemic.
Search, which had so far been spared by the economic slowdown, suffered in the third quarter from a pullback by advertisers. The revenue generated by Search and everything related to it thus amounted to $39.54 billion, against $40.87 billion anticipated by analysts.
YouTube, which faces strong competition from short-video platform TikTok, saw its revenue fall 2% to $7.07 billion. This is a big surprise as analysts were hoping for a 3% rise in revenue from the platform, which recently launched Shorts, a format to counter the rise of TikTok.
Philipp Schindler, chief business officer for Google, told analysts during the earnings’ call that the pullback of advertisers observed in the second quarter was accentuated in the third quarter. In particular, he said that financial services advertisers, including insurance, loans, mortgages and crypto, advertised their products less.
The firm also observed that fewer gaming companies were also advertising their products and services.
In this context, Alphabet will continue its austerity cure.
Chief Financial Officer Ruth Porat told analysts that the group would slow the pace of hiring sharply in the fourth quarter. Alphabet expects to hire only half the number of people recruited in the third quarter. Hiring will be mainly in “critical roles” and “technical talents.”
Porat also warned that the strong dollar which impacted the results in the third quarter would play a role “even larger” in the fourth quarter.
The strong dollar has been and will remain a big headache for Microsoft. It is now expected to be a 5-point headwind to fiscal year 2023 revenue growth.
Azure, the cloud services division that represents growth and justifies much of the betting placed on the software giant, was somewhat disappointed. Azure and other cloud services revenue rose 35% Y/Y (42% in CC), slightly below a 36.5% consensus.
The picture is not rosy in the next few months: Azure revenue growth is expected to be sequentially lower by about 5 points in constant currency.
Chief Financial Officer Amy Wood told analysts that higher energy prices are increasing the cost of delivering cloud services in Europe. This will continue in the months ahead, she warned.
The firm’s revenue rose 11% to $50.1 billion in the first quarter of fiscal 2023 ended Sept. 30. This is the weakest quarterly revenue growth recorded by Microsoft in five years. Net profit was $17.6 billion.
“In a world facing increasing headwinds, digital technology is the ultimate tailwind,” CEO Satya Nadella said in a statement. “In this environment, we’re focused on helping our customers do more with less, while investing in secular growth areas and managing our cost structure in a disciplined way.”
The Fall of the PC
Microsoft is also facing a collapse in the PC market after a golden age during the covid-19 pandemic.
Wood said that the PC will be “a tough market” for Microsoft in fiscal year 2023, while noting PC usage remains above pre-pandemic levels. She added that Microsoft wants to maintain “a steady hand” in this environment when it comes to investments, but is responding to the macro environment by slowing spending growth.
Worldwide PC shipments fell 19.5% in the third quarter compared to the third quarter of 2021, falling to 68 million units from 84.1 million units in the same period a year earlier, according to Gartner.
“This is the steepest market decline since Gartner began tracking the PC market in the mid-1990s and the fourth consecutive quarter of year-over-year decline,” the research company said on Oct. 10.
Alphabet shares fell nearly 7% after hours, as did those of Microsoft, which also lost nearly 7%.