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Feb 03 2023

Big Tech groups disclose $10bn in charges from job culls and cost cutting

Amazon, Meta, Alphabet and Microsoft will collectively incur more than $10bn in charges related to mass redundancies, real estate and other cost-saving measures, as the Big Tech companies reveal the hefty price they incur to rein in spending.

The US companies that have been implementing the largest job cuts in the tech sector disclosed the high costs related to their restructuring efforts in earnings statements released this week.

The four groups had previously announced 50,000 job cuts to convince Wall Street they were heading into a “year of efficiency”, as Meta chief executive Mark Zuckerberg described it. This trend comes after more than a decade of heavy spending in a focus on aggressive top-line growth.

Despite the companies’ high upfront costs such as severance payments, investors appear encouraged by the steps taken.

Since formally announcing their cuts, the companies have together added more than $800bn to their market capitalisations. Meta, the earliest mover among the Big Tech groups, has seen its value almost double since detailing its job cuts in November.

While savings could have been made by implementing more gradual cost reductions, tech companies were being rewarded by the markets for “ripping the band aid off”, said Wedbush analyst Dan Ives.

“Big Tech has been spending money like 80s rock stars for the last four to five years,” he said. “It feels like there’s adults in the room now.”

The process to become leaner in the wake of macroeconomic pressure contrasts starkly with the pandemic-era hiring boom, with headcounts increasing rapidly at tech companies that were responding to a rise in demand in digital products and services.

Apple remains the only large tech company that has not announced any job cuts or a cost-cutting programme, despite on Thursday reporting its first decline in quarterly revenues in three and a half years.

According to Layoffs.fyi, a tracker logging instances of tech redundancies, almost 250,000 employees have been let go across the sector since the start of last year.

Some of the most recent, from this past week, include software group Okta, which laid off 300 employees, data analysis company Splunk, with 325, and image-sharing social network Pinterest, which said 150 roles would go.

The deepest cuts have come from the biggest names. In November, Meta announced it would let go 11,000 of its employees, as well as dump office space and data centres.

On Wednesday, the Facebook parent detailed charges of $4.6bn related to restructuring. Severance costs ran to $975mn, according to a company filing, though that cost was offset by “decreases in payroll, bonus and other benefits expenses”. A further $1bn in charges related to reducing office footprint is expected in 2023.

Amazon chief executive Andy Jassy told employees in January the company would eliminate 18,000 roles.

Speaking to investors on Thursday, Amazon’s chief financial officer Brian Olsavsky said $640mn had been spent on severance in the fourth quarter of 2022, as well as an additional $720mn on abandoning real estate, primarily due to pulling back on opening new physical grocery stores. The company did not share further details on charges it might incur in the current quarter and beyond.

Google parent Alphabet, which is laying off 12,000 people, said it expected to incur severance costs ranging from $1.9bn to $2.3bn, with most of the impact in the current quarter. At the high end of that guidance, the cost of severance will work out at approximately $191,000 per employee. Alphabet faces a further $500mn in costs relating to office space reduction in the current quarter, it said.

Despite the cuts, Alphabet chief financial officer Ruth Porat told investors on Thursday the company would continue “hiring in priority areas, with a particular focus on top engineering and technical talent, as well as on the global footprint of our talent”.

Microsoft’s planned savings — which include 10,000 job cuts — has resulted in it incurring a $1.2bn charge in the final three months of 2022, $800mn of which was from severance pay.

Salesforce, which will not report earnings until March, is expected to be another company facing significant restructuring costs, having announced a 10 per cent reduction in its workforce last month. That move came as activist investor Elliott Management took a multibillion-dollar stake in the company, saying it intended to work “constructively with Salesforce to realise the value befitting a company of its stature”. 

Likewise, Alphabet has drawn attention from activist Sir Christopher Hohn, of TCI Fund Management, who wrote to chief executive Sundar Pichai, saying he needed to make further headcount cuts and trim “excessive employee compensation”.

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Big Tech groups disclose $10bn in charges from job culls and cost cutting Republished from Source https://www.ft.com/content/9daf27f6-dde7-40d8-b01d-33b70844aa69 via https://www.ft.com/companies/technology?format=rss

Written by Dave Lee in San Francisco · Categorized: entrepreneur, Technology · Tagged: entrepreneur, Technology

Feb 03 2023

Big Tech: Powell has put pep back in their step

Tech stocks apparently just needed the combination therapy of job cuts and Jay Powell.

On Thursday afternoon, Big Tech’s earnings season concluded with fourth-quarter numbers for Apple, Alphabet and Amazon. The numbers were uninspiring. Apple recorded its first quarterly revenue drop in nearly four years following supply chain challenges in China. Alphabet’s advertising business showed further signs of slowing. So did Amazon’s cloud computing unit.

But so far in 2023 shares of Apple, Alphabet, Amazon, Microsoft, Meta, and Netflix have soared between 10 and 57 per cent. Apple aside, the rest have typically cut about 10 per cent of jobs to show Wall Street some cursory commitment to cost control. Even so, headcount exceeds 2019 levels for these giants.

More importantly, moderating inflation figures have encouraged hopes that the Fed’s tightening cycle will soon be over. That has prompted investors to pile back into growth companies after the 2022 rout. The enthusiasm may be overdone. It is unclear that the acceleration of prices has been vanquished for good. With rates to stay well above zero where they hovered for a decade, steady-state valuations must retreat from 2021 levels regardless.

In 2022, the shares of Facebook owner Meta fell by almost two-thirds, driven by Mark Zuckerberg’s insistence on spending tens of billions on his vision for the metaverse. Earlier this week, after showing proper contrition and announcing a $40bn stock buyback, shares rose by more than a fifth. They are up nearly 60 per cent for the year. Still, the consensus forward 12 months earnings estimate for Meta remains down 36 per cent from the end of 2021.

As such, Meta’s price/earnings multiple of 22 times is not far off the 25 times it hit at the end of 2021. That snapback is far sharper than the rest of Big Tech.

Tech stock prices are only modestly cheaper than in the heady days of the pandemic. Investors should note that redundancies and a bounce related to monetary policy are one-off phenomena.

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Big Tech: Powell has put pep back in their step Republished from Source https://www.ft.com/content/f851ec6f-4095-4864-a93b-b70758ac890f via https://www.ft.com/companies/technology?format=rss

Written by bizbuildermike · Categorized: entrepreneur, Technology · Tagged: entrepreneur, Technology

Feb 02 2023

$5tn of ‘meh’ earnings

Good morning. It was a remarkable day on Wall Street yesterday. Presumably in response to Wednesday’s Fed meeting, the riskiest stocks staged a huge rally. The tech-heavy Nasdaq was up more than 3 per cent. The ARK Innovation ETF was up 6 per cent, and is now up 50 per cent in a bit over a month.

What is interesting about this is that these so-called “high duration” stocks (with lots of their expected value far in the future) did not move in response to a big change in interest rates. Yes, the yields on 2- and 10-year Treasuries are about 10 basis points lower than they were before Fed chair Jay Powell started talking. But that does not seem like a big enough move to make sense of yesterday’s frivolity. Rather than a big change in expectations for rate levels, what we are seeing is probably a big decline in the expected volatility of future rates. This depresses the risk premium on speculative stocks.

But even that is probably not a sufficient reason for this amazing “flight to shite” (as our vulgar colleague Robin Wigglesworth has called it). The current rally smells strongly of momentum-chasing and fear of missing out. Deep breaths, everyone. And send us your thoughts: robert.armstrong@ft.com and ethan.wu@ft.com.

Big tech trifecta

Yesterday afternoon three of the biggest and most important companies in the world reported earnings, all at once. If I was asked to summarise the reports from Apple, Alphabet, and Amazon in a single word, it might be “sober”. There was the usual Big Tech talk of the great opportunities ahead and amazing customer experiences, but the three also sung in unison on challenging economic conditions, decelerating revenue growth, and the need to control costs. A few words on each:

  • At Apple, revenue growth, after adjusting for foreign-currency headwinds, grew just 3 per cent from a year ago, an unexpectedly sharp slowdown only partly attributable to supply chain problems with the iPhone. The company expects growth in the current quarter to be similarly meagre. The CFO was careful to point out that expenses came in below the company’s targets.

  • Alphabet revenue slowed as well: currency-adjusted sales growth was 7 per cent, down from 11 per cent in the prior quarter. There was a lot of talk about “re-engineering the company’s cost base”.

  • Amazon increased revenue a bit more than expected, at 12 per cent, but guidance for the first quarter looked soft (The company has been known to under-promise). Cloud computing revenue growth slowed to 20 per cent in the quarter, that rate slowed to the mid-teens in January. The company expects the cloud business to face economic headwinds for the next couple of quarters. “Efficiency” was mentioned a lot in regard to the retail business.

Alphabet’s comments on its cost-control efforts were of particular interest. Here is Ruth Porat, the CFO:

In the first quarter of 2023, we expect to incur approximately $500mn of costs related to exiting leases to align our office space with our adjusted global headcount . . . This will be reflected in corporate costs. We will continue to optimise our real estate footprint . . . 

We adjusted the estimated useful lives of servers and certain network equipment starting in Q1 ‘23. We expect these changes will favourably impact our 2023 operating results by approximately $3.4bn

That real estate and server accounting are areas that Google is looking to bring costs down is interesting in itself. But it is particularly interesting given that Meta’s CFO said the same thing the day before:

The second component of the lower expense outlook is on cost of revenue . . . depreciation here is impacted by us extending the useful lives of non-AI servers in Q4. And then the third component is our outlook now reflects an estimated $1bn in facilities’ consolidation charges.

Writing recently about Big Tech’s need to cut costs, we have focused on the trade off between productivity and innovation. These companies spend many billions on projects that may or may not become good businesses. It is natural to question whether the more starry-eyed ideas shouldn’t be dumped. But how much might these companies save with belt tightening in pedestrian areas such as real estate that only incidentally touch innovation? I don’t know the answer, but it’s an important issue for investors.

One thing is for sure: the companies won’t find sustainable savings by lengthening the accounting lives of servers, which lowers depreciation expense, a non-cash item.

(Also, the point about “facilities consolidation” has implications for the real estate industry. Office Reits like to brag about Big Tech as premier clients. There may be somewhat less bragging in the months and years to come.)

It is interesting that the market response to these three fundamentally similar reports — significant slowing in revenue growth, lots of promises on costs — was muted. All three stocks fell in after-hours trading, but by less than they had gained in regular trading. Investors appear to be treating the slowing sales as a cyclical rather than a secular change, and are looking though it.

We can’t blame investors for being credulous. All three companies have incredibly strong competitive positions in industries that seem likely to grow faster than the economy for years to come. If single-digit-ish revenue growth is temporary, an artefact of the cycle, the shares in Apple and Alphabet look very fairly priced (it’s not as clear with Amazon). Should the revenue slowdown turn out to be permanent, on the other hand, Big Tech’s relationship with its investors is going to change fundamentally.

One good read

Lots to agree and disagree with in The Cut’s new etiquette rules.

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$5tn of ‘meh’ earnings Republished from Source https://www.ft.com/content/b567fb36-719c-491e-87d5-7848e991225a via https://www.ft.com/companies/technology?format=rss

Written by Robert Armstrong · Categorized: entrepreneur, Technology · Tagged: entrepreneur, Technology

Feb 02 2023

Broadcom chief Hock Tan seeks more acquisitions after $69bn VMware deal

Hock Tan, the executive who built Broadcom into a $250bn tech giant through a series of bold acquisitions, has signalled more dealmaking after his $69bn move for VMware, as the 71-year-old signs on for another five years as chief.

In an interview with the Financial Times, Tan said Broadcom would still look at semiconductor acquisitions, even after its hostile $142bn bid for Qualcomm, was blocked in 2018 by then-US President Donald Trump.

Broadcom’s bid for datacentre software provider VMware is also being examined by competition enforcers in the US, Europe and — since last week — the UK.

Although mega tech mergers came with heightened scrutiny these days, acquisitions remained a “key part of our strategy”, Tan said. Broadcom maintained a “select” list of “companies with assets that we would love to buy”, Tan said. “On that list, there are some in semiconductors, there are some in software.”

Whatever Broadcom’s next big move, Tan intends to lead it even as he coasts past the age at which most executives retire. “I just signed up for another five years,” Tan said. “I’m having too much fun.”

Tan, who was born in Malaysia and moved to the US to study at Massachusetts Institute of Technology, has worked in tech since the early 1990s. He was hired to run what is now Broadcom in 2006, a year after private equity firms KKR and Silver Lake paid $2.66bn for Avago Technologies, which originated in Hewlett-Packard’s semiconductors division in the 1960s.

After going public in 2009, Avago grew rapidly via acquisition, including semiconductor company LSI, networking tech maker Brocade and, in 2015, the $37bn takeover of communications giant Broadcom, whose name the group then took.

Tan’s dealmaking streak ran aground in March 2018. Trump’s intervention against the Qualcomm deal, which came after the Committee on Foreign Investment in the United States raised national security concerns, put an end to what would have been the biggest technology takeover in history.

Soon after, Broadcom relocated its corporate headquarters from Singapore to California, completing a plan that had seen Tan and Trump shaking hands in the Oval Office only months earlier.

Looking back, Tan said his biggest mistake in the Qualcomm “misadventure” was going hostile. “You don’t know what you’re getting into,” he said. “The only real way to do acquisitions is to do it on a friendly, arm’s-length basis.”

Tan did not leave his bankers idling for long. By the end of 2018, Broadcom had closed a $18.9bn acquisition of CA Technologies, a software company known for its high-margin mainframe business. A year later, Broadcom paid $10.7bn for Symantec’s enterprise security business. If regulators approve its $61bn cash-and-stock takeover of VMware, which also sees Broadcom assuming $8bn of debt, it will be Tan’s biggest deal yet.

Asked how VMware — which makes “virtualisation” software for managing corporate IT systems across a complex of mix of data centre hardware and cloud computing platforms — fits with the rest of Broadcom’s portfolio, Tan said simply: “It doesn’t.”

Each of Broadcom’s 22 product divisions — which include semiconductors, networking gear and enterprise software — ran “very independently”, he said, while sharing back-office functions and some sales teams.

“They are [each] allowed to invest as much as they need to, to get to be number one or maintain their number one position” in their respective markets, Tan said. If any of those units had to rely on one of their “sister” divisions to achieve that goal, he added, “they do not deserve to exist”.

“We look at VMware as the twenty-third product division,” Tan said. “Is there an overarching strategy? The answer, I hate to say, is ‘no’. The only overarching strategy is the model that says we buy assets and we run them better.”

Despite this model being compared to private equity, Tan insisted this is the “biggest misconception” about Broadcom: “We are not consolidators, we are operators.” He bristles at analysts who accuse him of slashing costs, halting innovation and hiking prices after closing a deal.

“I am not harvesting, I am trying to grow the product,” he said, a principle he hopes will drive VMware customers to “consume more because it adds value” to them, avoiding the need to raise prices.

Tan’s expansion strategy for VMware rests on pushing it into every kind of data centre, from private corporate facilities to Big Tech’s vast cloud computing platforms. It also forms the heart of his response to the European Commission’s questions about the deal.

In December, Brussels opened an in-depth investigation, saying it had “preliminary” concerns that the company would degrade or block interoperability between VMware’s software and Broadcom’s competitors’ datacentre hardware, locking customers in to its own kit.

“The basic value proposition for VMware to exist is that you must be able to virtualise every piece of hardware that exists in a data centre,” Tan said. “The minute you start degrading, discriminating [or] deprecating pieces of hardware, you just shoot yourself in the foot.”

At the same time as trying to placate regulators, Tan is facing the threat that Apple — its largest customer, accounting for about 20 cent of sales last year — may replace the Broadcom wireless chips in its iPhones with parts the Cupertino-based company has designed in-house.

Tan said he was “confident I can out-engineer them” despite the huge success of Apple’s other chip designs. “They value technology to sell their hardware, so they will take the best technology,” he said.

Alongside Apple and most companies in the electronics supply chain, Broadcom is reassessing where it sources and manufactures its products, after two years of shortages and disruption due to Covid-19 and growing tensions between the US and China.

Beyond a very few specialised components, Broadcom outsources manufacturing of its semiconductors. Tan said he was considering Intel as a potential new foundry partner, as an alternative to its main supplier, Taiwan-based TSMC.

Broadcom was also looking at a “little bit more” insourcing, Tan said, including potentially manufacturing its own substrates. These unsophisticated but vital pieces of connective tissue inside every chip have become a choke point in the semiconductor supply chain.

“Substrates are something we used to take for granted, like water and air,” he said. “Not anymore.”

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Broadcom chief Hock Tan seeks more acquisitions after $69bn VMware deal Republished from Source https://www.ft.com/content/0a4013b6-b3b9-49fd-87a9-bd0da5e229b1 via https://www.ft.com/companies/technology?format=rss

Written by Tim Bradshaw in London · Categorized: entrepreneur, Technology · Tagged: entrepreneur, Technology

Feb 02 2023

Apple reports first decline in revenue in three-and-a-half years

Apple posted a decline in quarterly revenues for the first time in three-and-a-half years after “significant” supply chain disruptions in China delayed deliveries of iPhones during the important holiday period.

The worse than expected performance highlighted Apple’s dependence on China for manufacturing and came after shipments of its high-end iPhones were hit by an outbreak of Covid-19 at an assembly hub run by partner Foxconn in Zhengzhou.

Tim Cook, chief executive, signalled that revenues in the first three months of this year would also miss the prior year’s, even though iPhone sales were expected to “accelerate”, meaning sales of Apple’s other products would be hard hit by lower demand.

Apple posted total revenues of $117.2bn for the latest quarter, a fall of 5.5 per cent compared to the same period of 2021 and below analyst forecasts for $121.1bn. Net profits of $30bn were 13.4 per cent lower than last time and also slightly missed expectations.

“In total, we expect our March quarter year-over-year revenue performance to be similar to the December quarter,” Cook said, adding that sales of Macs and iPads would probably fall by double digits in part because of a “challenging” economic environment.

Shares of Apple fell by more than 3 per cent in after-hours trading.

Apple’s revenue shortfall came as Amazon and Alphabet pointed to further weakening in some of their core markets in the latest quarter. Taken together, the earnings reports from three of the world’s biggest companies provided a note of caution for investors a day after better than expected results from Facebook owner Meta helped fuel a sharp rally in technology stocks.

Revenue growth slowed and earnings stalled at Amazon Web Services, the ecommerce group’s biggest moneymaker, as big customers looked for ways to save money on their cloud spending.

Meanwhile, Alphabet’s revenue came in below expectations as its advertising revenue fell for only the second time in its history, partly because of the strength of the US dollar and comparisons with soaring growth a year before.

Cook said that the China supply chain challenges affecting iPhone shipments had been sorted out, adding: “We’re now at the point where production is what we need it to be. And so the problem is behind us.”

But he offered a more gloomy assessment of sales of Apple’s Mac computers, warning that the while the company was “well positioned” in the PC market “it will be a little rough in the short-term”.

Despite the lacklustre earnings and outlook, Apple did not announce any job cuts or a cost-cutting programme, marking it out as the only large tech company to avoid mass redundancies at a time when others are making large headcount reductions.

Apple did not provide any forward guidance, something it has not done for three years owning to what it describes as pandemic uncertainty.

In an interview with the Financial Times, finance chief Luca Maestri said that Apple’s “active installed base” — the number of its devices in use — had crossed the 2bn threshold, up from 1.8bn a year ago. “This is twice the number of active devices that we had just seven years ago,” he said.

Maestri said that were it not for the supply chain problems in China, sales of iPhones would have grown in the quarter.

Apple had warned three months ago that a strong dollar could shave up to 10 percentage points off revenue, equal to a roughly $12bn hit. The actual impact was about 8 percentage points.

“Eight per cent is a lot of revenue that we lost to the strength of the dollar, but it’s better than it was three months ago because the dollar has weakened a bit,” Maestri said.

Additional reporting by Richard Waters

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Apple reports first decline in revenue in three-and-a-half years Republished from Source https://www.ft.com/content/07c6e808-d650-44b1-b059-fa589da036e8 via https://www.ft.com/companies/technology?format=rss

Written by Patrick McGee in San Francisco · Categorized: entrepreneur, Technology · Tagged: entrepreneur, Technology

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