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How worsening financial state impacts IT spending

As inflation rises, purse strings are tightening at the tech giants, that may have a material effect on chipmakers and providers of IT equipment

Cliff Saran

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Published: 02 Aug 2022 13: 02

The most recent quarterly filing from the worlds largest tech firms has revealed that have been influenced by the worsening financial state.

Because the cloud market continues to surge, the largest story in Q2 was about macroeconomics instead of actual cloud usage, said John Dinsdale, a chief analyst at Synergy Research Group. When country market numbers are aggregated in US dollars, the yearly growth rate dropped by over six percentage points because of forex movements, with over 1 / 2 of that reduction being accounted for in Q2 alone.

During Amazons latest quarterly earnings call, CFO Brian Olsavsky spoke of increased energy costs. We continue steadily to see volatility in utility prices all over the world and operating our AWS datacentres, he said in the transcript of the earnings call posted on Seeking Alpha. Olsavsky said the business incurred about $60bn in capital investments, which 40% contains technology infrastructure, primarily supporting AWS as well as its worldwide stores business.

Similarly, Meta, parent company of Facebook, reported capital expenditures of $7.7bn, driven by investments in servers, datacentres and network infrastructure. CFO Dave Wehner said the largest section of spending was linked to server spend, which include its artificial intelligence (AI) infrastructure.

There is absolutely no denying that famous brands Meta, Facebook and Microsoft will continue steadily to spend money on IT infrastructure strategically, but economic pressure is forcing them to believe differently.

In February, Olsavsky revealed Amazons plans to increase the useful life of its servers from four years to five, and its own networking equipment from five years to six later on.

Based on the transcript of the earnings call posted on Seeking Alpha, his decision reflects a significant team effort by AWS to create its server and networking equipment go longer. Olsavsky said the business has been operating at scale for over 15 years, adding: We continue steadily to refine our software to perform better on the hardware.

Even though Meta does not have any plans to curb its investment in AI, incoming CFO Susan Li said: We have been looking at methods to become more efficient in the manner that people use hardware where which makes sense, and we have been emphasising efficiency inside our code development process.

Through the earnings demand the quarter ending 30 June, Microsoft CFO Amy Hood discussed the way the company was working towards extending the life span of its datacentre equipment, which may create a favourable effect on operating income. Based on the transcript of the earnings call posted on Seeking Alpha, Hood said Microsoft was extending the life span of its server and network equipment assets from 4-6 years.

Investments inside our software that increased efficiencies in how exactly we operate our server and network equipment, and also advances in technology, have led to lives extending beyond historical accounting useful lives, she said. This change only impacts the timing of depreciation expense later on for these assets.

This represents a 50% upsurge in the useful life of the servers and a saving of over $1bn within the next quarter, with a saving for the entire year of $3.7bn.

There is absolutely no denying that rising fuel costs along with other inflationary pressures are causing these mega firms to curb tech spending, though it is very much indeed the business they’re in. What’s interesting may be the significant savings they’re projecting from making their servers and network equipment go longer.

But these savings are coming at a price. Intels client computing and datacentre and AI group has been largely influenced by continued adverse market conditions, the business said in its latest quarterly earnings report. CEO Pat Gelsinger apologised to shareholders, saying we should do better following the company posted a 22% decline in revenue because of its second quarter of 2022.

Analyst Gartner has lowered its forecast for 2022 global semiconductor revenue from the prior quarters forecast by $36.7bn, to $639.2bn, as fiscal conditions are anticipated to worsen through the entire year.

In accordance with Gartner, PC shipments are set to decline by 13.1% in 2022 after recording growth in 2020 and 2021. Semiconductor revenue from PCs is estimated to record a decline of 5.4% in 2022. Semiconductor revenue from smartphones is on pace to slow to 3.1% growth in 2022, in comparison to 24.5% growth in 2021. From an enterprise perspective, inventories are recovering rapidly, lead times are starting to shorten, and prices are needs to weaken.

In the Seeking Alpha transcript of the Q2 2022 earnings call, Intels Gelsinger said: Due to macro weaknesses, we have now expect the PC TAM [total addressable market] to decline roughly 10% in twelve months 2022, characterised by broadening consumer weakness and relative strength in enterprise and higher-end SKUs [stocktaking units].

Gelsinger claimed Intel was shipping more chips to its customers like the major PC manufacturers and hyperscalers below the particular level they might consume. A few of our largest customers are reducing inventory levels for a price not observed in the final decade, he added.

Despite these lower degrees of inventory at Intels largest customers, Gelsinger said pricing actions should enable sequential growth in to the second half. This shows that Intel will either make an effort to push higher-end processors or raise prices.

Richard Gordon, practice vice-president at Gartner, said: We have been already seeing weakness in semiconductor end markets, especially those subjected to consumer spending. Rising inflation, taxes and interest levels, as well as higher energy and fuel prices, are putting pressure on consumer disposable income. That is affecting shelling out for electronic products such as for example PCs and smartphones.

The worsening financial state will put further pressure on consumers and businesses to curb spending. The task for the tech sector is how it rides this storm, while continuing to advance technology developments. If anything, the quote from Metas Li to focus on making software development better suggests there’s room for improvement on the program side that avoids businesses having to upgrade server and network equipment.

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