Enterprise

5 things to watch in Big Tech’s earnings

Currency headwinds, waning demand and questions over pricing strategy are set to be top of mind for investors as Big Tech reports earnings.

Stocks

Big Tech's earnings are expected to get worse.

Photo: Michael M. Santiago/Getty Images

With each passing quarter, Big Tech’s earnings increasingly approach not with the boisterous victory chant that defined the pandemic boom, but with a death march reminiscent of Captain Hook walking a prisoner down the plank.

Everyone seems to be waiting to see who will blink first. Until now, most of the major IT vendors have squeezed by with quarterly earnings and annual outlooks that, by and large, appeased investors — with some sales forecasts maybe coming in on the weaker side. However, Salesforce, Microsoft and other prominent vendors continue to pursue cost-cutting measures to ensure profitability, a step that seemed unfathomable a year ago.

But it’s expected to get much worse. In a reflection of the skepticism, shares of major names including Netflix, Salesforce and Meta — as well as growing but still unprofitable providers like Twilio — are all down double-digit percentages. Meanwhile, cash-strapped vendors like Asana are near rock-bottom and face major questions about their viability in a recessionary environment. Even Google is slowing hiring. And there’s already been one sacrificial lamb: Dan Springer at DocuSign.

Part of that is the market correcting itself from the hyper-inflated revenue multiples that priced companies like Snowflake to nearly perfection. But many stocks could plummet even lower in the coming months. Now, it’s just a matter of which companies will begin the potentially slow stampede of muted sales outlooks — for some, a strategy to guide lower now to make future growth look more significant — and launch the subsequent cascade of analyst downgrades.

“We are going to see some signs of macro weakness,” said RBC Capital Markets analyst Rishi Jaluria. “The bigger question has to do with the guide and what happens in the back half of the year. There are so many companies at risk for downgrade revisions.”

Still, the upcoming earnings cycle shouldn’t be too apocalyptic. Most vendors of scale have customers locked into multiyear contracts, complete with multiple products SKUs, and won’t be as immediately susceptible to any wild swings in spending. That’s perhaps not as true for smaller providers, especially those that have a business model focused on selling outside the central IT team, or companies that gain revenue based on end-user consumption.

But come the end of the year, when businesses make important decisions about spending priorities, things could get brutal. That’s especially true for software makers that sell expensive systems that can require multiyear deployments, like SAP, Coupa and Workday. Even cloud infrastructure, the industry’s proverbial golden goose, could see a slowdown as companies look to clamp down on runaway spending.

Here are five things to bear in mind this earnings cycle:

How much will customer demand wane — and where?

Even before the economic red flags began sprouting more vividly this year, investors were skittish about the growth prospects for IT spend. There was a general fear that organizations mashed up several years of investments into two, bloating tech stacks and leading companies to curtail spending in 2022 and beyond.

First-quarter earnings showed the demand environment was quite steady. But analysts and company executives don’t expect that to continue. While it may not spell trouble this earnings cycle, annual and year-ahead forecasts could begin to look more gruesome, particularly for those companies that have a higher percentage of their business in regions that are showing more urgent signs of economic turmoil, like Europe.

Demand shouldn’t fall too significantly though, given that many companies are in the midst of several-year digital overhaul initiatives. But it will be enough to begin to weed out those vendors that were largely propped up by the surge in pandemic spending. And this quarter should give shareholders a better idea of which companies are best positioned to weather the coming storm.

“Investors' biggest assumption is things get tougher from here to the end of the year,” said Wells Fargo analyst Michael Turrin.

No longer a question of ‘if’: What’s the FX impact?

It already began rearing its ugly head last quarter, but foreign exchange rates, or FX, are poised to wreak havoc on earnings.

Most major technology vendors are based in the U.S., but a sizable portion of their operations are around the globe. So if the dollar strengthens against the other currencies — like the yen or the euro, which is at parity with the dollar for the first time in 20 years — the “headwinds can really begin to kick up,” said Macquarie senior analyst Fred Havemeyer.

“The revenue and the cash flows you are booking and recognizing overseas, they are hit,” he told Protocol.

The issue is so pronounced that ServiceNow CEO Bill McDermott said it would affect every technology vendor, a statement that sank his own company’s stock.

What’s next for consumption-based pricing?

When Snowflake said revenue would slip by $97 million this year as a result of improvements that made it cheaper for customers to use the product, the pronouncement came down like a hammer.

For one, it seemed to have come out of nowhere. Just a few months prior, CEO Frank Slootman brushed aside any notion that Snowflake was facing a looming sales shortfall. Others said it simply didn’t make sense: that an infrastructure upgrade couldn’t possibly warrant such a sudden shortfall. Ultimately, it had investors asking lots of questions about consumption-based pricing. And now, coupled with the economic uncertainty, the model is a potential red flag.

While nowhere near as prevalent as the typical SaaS model, consumption-based pricing is now widely deployed across the industry. But all the attractiveness of the set-up — the ability to pay for only what you use — is now its biggest drawback. Ask early Snowflake customers the size of their first bills, and it’s likely you’ll hear something along the lines of: “much higher than we thought.”

In boom times, that doesn’t matter as much. However, as enterprises look to cut spending, expect limits on consumption for pricey software to be an early avenue that executives look at.

That could spell trouble for Snowflake and others, which operate entirely on a consumption-based pricing model. MongoDB, for example, recently forecasted lower usage of its flagship database product Atlas.

The narrative is even calling into question the continued dominance of Microsoft, AWS and Google. While all three firms will continue to post pretty sizable growth, it may not be as blockbuster as the prior quarter.

The most well-positioned companies are those “selling mainly into larger enterprises and who operate subscription pricing models,” Morgan Stanley analysts wrote in a recent note. Meanwhile, “we are becoming more cautious on companies operating usage based models.”

Is product-led growth still an attractive strategy?

“Product-led growth” has been among enterprise software’s biggest buzzwords in the past few years. And the popular accompanying sales model, one in which a line of business users can purchase the product on their own with the click of a button, was being deployed by the likes of Smartsheet and PagerDuty.

But such a decentralized buying system could become less attractive in economic hard times. Companies may want to centralize more buying within IT to help keep a lid on tech spend, which could force companies like Smartsheet to try to grow their enterprise businesses much faster than they had planned.

And small businesses, which account for a large chunk of the sales at firms like Atlassian, may be particularly hit by a downturn and forced to cut costs dramatically.

How will the ISVs fare against the platforms?

Historically, vendors that offer a suite of tools, like Salesforce, Oracle, ServiceNow and others, tend to fare better than providers selling independent software vendors, or ISVs.

The appetite for risk goes down and the need to have that new, shiny feature offered by an ISV — but soon to be featured in Microsoft Teams’ newest product update — subsides. So-called “best of breed” providers remain confident that customers will be hesitant to consolidate too heavily on one of the major platforms. But analysts are already raising concerns about small but growing companies like Asana, which are fast running out of money and have little competitive moat around them to prevent larger players from nabbing customers.

However, other vendors that sell products that tout product features that are more attractive in economic hard times, like automation, could show resilience. Still, even RPA provider UiPath laid off 5% of its workforce, indicating the impact of the slowdown will be felt broadly in the tech sector.

Fintech

Upstart has a new plan to sell Wall Street on its loans

The AI-powered lender will hold some loans on its balance sheet as it seeks partners for long-term capital.

Despite the current struggles, Upstart views the marketplace model as the best way to write to keep its loan business growing.

Photo: Upstart

After a revenue drop its CEO called “unacceptable,” the leadership at fintech lender Upstart is making a bet on the strength of its ability to underwrite loans with AI.

The San Mateo company is planning to leave some loans on its balance sheet that investors do not want to buy, as concerns about the economy shift Wall Street away from backing riskier consumer debt. Rather than pull back on its lending in response, the company said it will hold some loans as it seeks longer-term capital partners.

Keep Reading Show less
Ryan Deffenbaugh
Ryan Deffenbaugh is a reporter at Protocol focused on fintech. Before joining Protocol, he reported on New York's technology industry for Crain's New York Business. He is based in New York and can be reached at rdeffenbaugh@protocol.com.
Sponsored Content

How cybercrime is going small time

Blockbuster hacks are no longer the norm – causing problems for companies trying to track down small-scale crime

Cybercrime is often thought of on a relatively large scale. Massive breaches lead to painful financial losses, bankrupting companies and causing untold embarrassment, splashed across the front pages of news websites worldwide. That’s unsurprising: cyber events typically cost businesses around $200,000, according to cybersecurity firm the Cyentia Institute. One in 10 of those victims suffer losses of more than $20 million, with some reaching $100 million or more.

That’s big money – but there’s plenty of loot out there for cybercriminals willing to aim lower. In 2021, the Internet Crime Complaint Center (IC3) received 847,376 complaints – reports by cybercrime victims – totaling losses of $6.9 billion. Averaged out, each victim lost $8,143.

Keep Reading Show less
Chris Stokel-Walker

Chris Stokel-Walker is a freelance technology and culture journalist and author of "YouTubers: How YouTube Shook Up TV and Created a New Generation of Stars." His work has been published in The New York Times, The Guardian and Wired.

Enterprise

Does your boss sound a little funny? It might be an audio deepfake

Voice deepfake attacks against enterprises, often aimed at tricking corporate employees into transferring money to the attackers, are on the rise. And at least in some cases, they’re succeeding.

Audio deepfakes are a new spin on the impersonation tactics that have long been used in social engineering and phishing attacks, but most people aren’t trained to disbelieve their ears.

Illustration: Christopher T. Fong/Protocol

As a cyberattack investigator, Nick Giacopuzzi’s work now includes responding to growing attacks against businesses that involve deepfaked voices — and has ultimately left him convinced that in today's world, "we need to question everything."

In particular, Giacopuzzi has investigated multiple incidents where an attacker deployed fabricated audio, created with the help of AI, that purported to be an executive or a manager at a company. You can guess how it went: The fake boss asked an employee to urgently transfer funds. And in some cases, it’s worked, he said.

Keep Reading Show less
Kyle Alspach

Kyle Alspach ( @KyleAlspach) is a senior reporter at Protocol, focused on cybersecurity. He has covered the tech industry since 2010 for outlets including VentureBeat, CRN and the Boston Globe. He lives in Portland, Oregon, and can be reached at kalspach@protocol.com.

Fintech

Binance’s co-founder could remake its crypto deal-making

Yi He is overseeing a $7.5 billion portfolio, with more investments to come, making her one of the most powerful investors in the industry.

Binance co-founder Yi He will oversee $7.5 billion in assets.

Photo: Binance

Binance co-founder Yi He isn’t as well known as the crypto giant’s colorful and controversial CEO, Changpeng “CZ” Zhao.

That could soon change. The 35-year-old executive is taking on a new, higher-profile role at the world’s largest crypto exchange as head of Binance Labs, the company’s venture capital arm. With $7.5 billion in assets to oversee, that instantly makes her one of the most powerful VC investors in crypto.

Keep Reading Show less
Benjamin Pimentel

Benjamin Pimentel ( @benpimentel) covers crypto and fintech from San Francisco. He has reported on many of the biggest tech stories over the past 20 years for the San Francisco Chronicle, Dow Jones MarketWatch and Business Insider, from the dot-com crash, the rise of cloud computing, social networking and AI to the impact of the Great Recession and the COVID crisis on Silicon Valley and beyond. He can be reached at bpimentel@protocol.com or via Google Voice at (925) 307-9342.

Policy

Trump ordered social media visa screening. Biden's defending it.

The Knight First Amendment Institute just lost a battle to force the Biden administration to provide a report on the collection of social media handles from millions of visa applicants every year.

Visa applicants have to give up any of their social media handles from the past five years.

Photo: belterz/Getty Images

Would you feel comfortable if a U.S. immigration official reviewed all that you post on Facebook, Reddit, Snapchat, Twitter or even YouTube? Would it change what you decide to post or whom you talk to online? Perhaps you’ve said something critical of the U.S. government. Perhaps you’ve jokingly threatened to whack someone.

If you’ve applied for a U.S. visa, there’s a chance your online missives have been subjected to this kind of scrutiny, all in the name of keeping America safe. But three years after the Trump administration ordered enhanced vetting of visa applications, the Biden White House has not only continued the program, but is defending it — despite refusing to say if it’s had any impact.

Keep Reading Show less
Anna Kramer

Anna Kramer is a reporter at Protocol (Twitter: @ anna_c_kramer, email: akramer@protocol.com), where she writes about labor and workplace issues. Prior to joining the team, she covered tech and small business for the San Francisco Chronicle and privacy for Bloomberg Law. She is a recent graduate of Brown University, where she studied International Relations and Arabic and wrote her senior thesis about surveillance tools and technological development in the Middle East.

Latest Stories
Bulletins