A New Business Model for the Tech Industry: “Do More with Less”

Last Thursday’s Apple report marked the end of the earnings season for the mega-tech companies a week later. The theme investors have heard from executives both in Silicon Valley and beyond is that it’s time to “do more with less.”

Cost reductions, which began in earnest in the second half of 2022, accelerated in the first quarter and continue in the second quarter. Microsoft Chief Executive Satya Nadella told employees Wednesday that there will be no pay increases for full-time employees after the company announced 10,000 job cuts earlier this year.

While the industry giant is enjoying a tough 2022 stock recovery, customer spending will be conservative for at least the near future, making it clear that the era of technology overabundance is over.

Alphabet CEO Sundar Pichai has focused on efficiency after being criticized by employees for taking more than $200 million in stock compensation during the company’s downsizing. At the company’s earnings call in late April, business chief Philip Schindler described a “macro environment of doing more with less.”

The phrase has been used in many recent tech earnings calls. Content owners are tackling a challenging market in search of profitable growth, said Jeff Greene, CEO of digital ad buying firm Trade Desk. “That means people need to do more with less.” from their advertisement.

Throughout the earnings season, executives cited macroeconomic pressures, currency headwinds and cautious spending by customers and consumers. For many technology leaders, the plan going forward is to continue to reallocate headcount and spending to revenue drivers and consider ways to reduce long-term costs for computing, supply chain and inventory.

Among America’s most valuable technology companies, Microsoft, Apple, Meta, Amazon and Alphabet, two big areas for increased investment are cloud infrastructure and AI efforts. In its earnings call, company executives walked a tightrope by reminding investors of the importance of spending in these areas while working hard to cut costs across the board.

Google’s parent company Alphabet has spent the past few months dealing with the kind of job cuts the company didn’t have to go through in its first quarter century. The company has implemented mass layoffs, delayed hiring, cut travel and entertainment budgets, suspended construction of at least one office campus, and cut investments in more experimental projects like the Area 120 technology incubator. bottom.

That all came after Pichai announced plans last year to “increase the company’s productivity by 20%.”

During Alphabet’s first-quarter earnings call, executives discussed efforts to allocate resources to key areas such as cloud, AI, hardware, YouTube and search. Schindler emphasized “search’s ability to surface demand and deliver measurable ROI in an uncertain environment” ahead of the company’s announcement Wednesday that it will bring AI to Google Search.

In addition to the January layoffs that affected about 12,000 employees, or 6% of Google’s workforce, Pichai said in a conference call with Google Brain, an AI-focused group He mentioned further structural changes, such as bringing DeepMind under one umbrella with “pooled computational resources.”

“Starting in the second quarter of 2023, costs associated with teams and activities transferred from Google Research will be transferred from Google services to Google DeepMind within Alphabet’s unallocated corporate costs,” Pichai said.

Alphabet will also look at ways it could reduce its real estate portfolio and save on computing costs, including through efforts to improve the efficiency of AI model training and more fully utilizing its data centers. Pichai said. The company will also improve cost control for suppliers and vendors and leverage AI and automation to “improve productivity across Alphabet,” said financial director Ruth Porat.

At Microsoft’s April 25 earnings call, executives said the conglomerate will continue to narrow its focus, prioritizing its cloud business, which has seen an increase in short-term customer contracts. And alongside his $13 billion commitment to the company’s OpenAI, the buzz about AI is endless.

“As we look to a future where chat is the new way people seek information, consumers will be able to bring their business models and modalities to life with Azure-powered chat entry points across Bing, Edge, Windows and OpenAI’s ChatGPT. You have a choice,” Nadella said in the article. phone. “We look forward to continuing this journey in the generational shift in the largest software category, search.”

Microsoft announced in March that it would cut 10,000 jobs, or nearly 5% of the company’s workforce, following executive comments in late 2022 about the importance of cutting costs and improving productivity.

“We have been through almost a year from the pivot period that Satya spoke of, the launch of a ton of new workloads (let’s call it the pandemic period) to this migration post. We really are celebrating a year since it started,” CFO Amy Hood said during the company’s latest earnings call. “I keep setting optimizations, but at some point the workload can no longer be optimized.”

Amazon’s first-quarter earnings report comes after an unprecedented period of cutbacks for an e-retailer.

Chief Financial Officer Brian Orsubsky said on a conference call that a troubling environment of inflation and economic uncertainty has customers looking to “further increase their budgets,” adding that “we’re not going to buy Amazon.com.” It’s similar to what we’re doing in ,” he added.

The company has cut 27,000 jobs in recent months, including job cuts in Amazon Web Services, Twitch, the device business, advertising divisions, as well as HR and other divisions. Amazon has also slowed or frozen hiring in areas such as retail and Amazon Prime, and cut budgets for more experimental projects such as delivery robots.

“We have taken a thorough look at the entire company and are confident in the long-term potential of each initiative to deliver sufficient revenue, operating income, free cash flow and return on invested capital,” CEO Andy Jassy said during the earnings call. I asked myself if .

That forced the company to close bricks-and-mortar bookstores, four-star stores and businesses like Amazon Fabric and Amazon Care, Mr. Jassy said, “and I didn’t see a way to make a meaningful profit there.” rice field. He added that Amazon has also changed some programs, such as removing free shipping on grocery orders over $35.

Amazon, on the other hand, is all about large-scale language models in the midst of the AI ​​boom, with cloud infrastructure, chips, regional fulfillment centers, and ultimately enterprise customers tailoring Amazon’s AI models to their own purposes. We also invest in businesses that enable customization.

“Every business within Amazon is built on a massive language model to reinvent the customer experience, and you will find it in every business, store, ad, and device of ours. [and] entertainment,” Jussie said.

Apple started an earnings call with reporters after reporting better-than-expected earnings, but it still posted a 3% year-over-year decline. The company said macroeconomic challenges and foreign exchange headwinds have caused some impediments to iPad and Mac earnings.

Executives said economic conditions were impacting advertising and mobile games, reiterating the company’s decision to redirect spending to its revenue drivers.

“We are tightly managing our spending by remaining focused on long-term growth through our continued investment in innovation and product development,” CFO Luca Maestri said on a conference call.

Apple, which has avoided significant job cuts so far, also said it plans to continue improving its supply chain operations.

“We will continue to explore ways to optimize our supply chain based on what we learn every day, every week and more,” said CEO Tim Cook. He added that “supply chains are incredibly resilient” despite a “horror parade” from the pandemic and chip shortages to the economy.

Over the past six months, the company has taken steps such as deferring bonuses, delaying the production of less urgent projects, cutting travel budgets and halting hiring in some departments.

Meta CEO Mark Zuckerberg said earlier this year that 2023 will be the “year of efficiency” after the company’s stock lost two-thirds of its value in 2022. , received praise from Wall Street.

The company has announced 21,000 job cuts and a slowdown in hiring since November. At the same time, Zuckerberg takes every opportunity to highlight investments in AI, which the company claims will improve productivity and advertising efficiency within the company.

During the company’s first-quarter earnings call, executives deprioritized some of the lesser revenue drivers and pushed for ad ranking systems, feed and reel recommendation engines, and generative AI.

“I think this is going to literally affect all of our products and services in many ways. We are working on it,” Zuckerberg said.

On the same subject, CFO Susan Lee added: “We are still in the early stages of understanding different applications and possible use cases, and this could be a significant investment opportunity for us, which is relatively early in the return curve. I think.” It will affect other AI work we have done. “

However, Zuckerberg insisted that the late 2021 name change to Meta was not rushed. Meta lost another $3.99 billion in its Reality Labs division, which is investing in the Metaverse, and Zuckerberg said on the conference call, “We’ve been focusing on both AI and the Metaverse for years. We will continue to focus on both,” he said.

clock: Alex Kantrowitz Talks Tech Earnings