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How worsening economic climate impacts IT spending

As inflation rises, purse strings are tightening at the tech giants, which will have a material impact on chipmakers and providers of IT equipment

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The latest quarterly filing from the world’s largest tech firms has revealed that all have been impacted by the worsening economic climate.

“As the cloud market continues to surge, the biggest story in Q2 was all about macroeconomics rather than 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 due to foreign exchange movements, with over half of that reduction being accounted for in Q2 alone.”

During Amazon’s latest quarterly earnings call, CFO Brian Olsavsky spoke of increased energy costs. “We continue to see volatility in utility prices around the world and operating our AWS [Amazon Web Services] datacentres,” he said in the transcript of the earnings call posted on Seeking Alpha.

Olsavsky said the company incurred about $60bn in capital investments, of which 40% consisted of technology infrastructure, primarily supporting AWS together with its worldwide stores business.

Similarly, Meta, parent company of Facebook, reported capital expenditure of $7.7bn, driven by investments in servers, datacentres and network infrastructure. CFO Dave Wehner said the biggest area of spending was related to server spend, which includes its artificial intelligence (AI) infrastructure.

There is no denying that the likes of Amazon, Meta and Microsoft will continue to invest in IT infrastructure strategically, but economic pressure is forcing them to think differently.

In February, Olsavsky revealed Amazon’s plans to extend the useful life of its servers from four years to five, and its networking equipment from five years to six in the future.

According to the transcript of the earnings call posted on Seeking Alpha, his decision reflects “a tremendous team effort by AWS to make its server and networking equipment last longer”. Olsavsky said the company has been operating at scale for over 15 years, adding: “We continue to refine our software to run more efficiently on the hardware.” 

And while Meta has no plans to curb its investment in AI, incoming CFO Susan Li said: “We are looking at ways to be more efficient in the way that we use hardware where that makes sense, and we are emphasising efficiency in our code development process.”

During the earnings call for the quarter ending 30 June, Microsoft CFO Amy Hood discussed how the company was working towards extending the life of its datacentre equipment, which would result in a “favourable” impact on operating income. According to the transcript of the earnings call posted on Seeking Alpha, Hood said Microsoft was extending the life of its server and network equipment assets from four to six years. 

“Investments in our software that increased efficiencies in how we operate our server and network equipment, as well as advances in technology, have resulted in lives extending beyond historical accounting useful lives,” she said. “This change only impacts the timing of depreciation expense in the future for these assets.”

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

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There is no denying that rising fuel prices and other inflationary pressures are causing these mega firms to curb tech spending, even though IT is very much the business they are in. What is interesting is the significant savings they are projecting from making their servers and network equipment last longer.

But these savings are coming at a cost. Intel’s client computing and datacentre and AI group has been largely impacted by continued adverse market conditions, the company said in its latest quarterly earnings report. CEO Pat Gelsinger apologised to shareholders, saying “we must do better” after the company posted a 22% decline in revenue for its second quarter of 2022.

Analyst Gartner has lowered its forecast for 2022 global semiconductor revenue from the previous quarter’s forecast, by $36.7bn, to $639.2bn, as economic conditions are expected to worsen through the year.

According to 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, compared with 24.5% growth in 2021. From an enterprise perspective, inventories are recovering rapidly, lead times are beginning to shorten, and prices are starting to weaken.

In the Seeking Alpha transcript of the second-quarter 2022 earnings call, Intel’s Gelsinger said: “As a result of macro weaknesses, we now expect the PC TAM [total addressable market] to decline roughly 10% in calendar year 2022, characterised by broadening consumer weakness and relative strength in enterprise and higher-end SKUs [stocktaking units].”

Gelsinger claimed Intel was shipping chips to its customers, such as the major PC manufacturers and hyperscalers, below the level they could consume. “Some of our largest customers are reducing inventory levels at a rate not seen in the last decade,” he added.

Despite these lower levels of inventory at Intel’s largest customers, Gelsinger said “pricing actions should allow for sequential growth into the second half”. This suggests that Intel will either try to push higher-end processors or raise prices.

Richard Gordon, practice vice-president at Gartner, said: “We are already seeing weakness in semiconductor end markets, especially those exposed to consumer spending. Rising inflation, taxes and interest rates, together with higher energy and fuel costs, are putting pressure on consumer disposable income. This is affecting spending on electronic products such as PCs and smartphones.”

The worsening economic climate will put further pressure on consumers and businesses to curb spending. The challenge for the tech sector is how it rides this storm, while continuing to advance technology developments. If anything, the quote from Meta’s Li to work on making software development more efficient suggests there is room for improvement on the software side that avoids businesses needing to upgrade server and network equipment.

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