Tech companies took a hit from war and supply chain disruption

The war in Ukraine and supply chain issues caused upheaval for tech companies this quarter.

Tech companies took a hit from war and supply chain disruption

Here are some of the major takeaways from earnings week.

Illustration: Christopher T. Fong/Protocol

It’s earnings season, folks.

Some tech companies reported big profits, but supply chain constraints, streaming churn and the war in Ukraine also had ramifications. That’ll likely continue into Q2.

Here are some of the top takeaways from the major companies' earnings this month.

Netflix fell from its pedestal

Netflix, once the king of streaming services, was dethroned last week after disclosing that it had lost 200,000 subscribers in the last quarter, leading to a 35% drop in share prices. Now the company is scrambling, looking at options like monetizing shared accounts and a lower-priced ad-supported tier. CFO Spencer Neumann said that the company is working on getting its spending under control. Days after the earnings came out, Netflix laid off a number of reporters it had hired for Tudum, an online entertainment magazine focused on content streaming on its service.

But not all streaming services are feeling the burn of churn: HBO Max and HBO added 3 million subscribers during the quarter, ending the quarter with 76.8 million total.

EVs are still the darling of major automakers

Lots of companies have placed big bets on EVs, but Ford is taking a hit from embracing an all-electric future: The company reported a $3.1 billion loss from its massive stake in luxury EV-maker Rivian. Ford invested $500 million in Rivian in April 2019, and despite the hype for the startup’s November IPO, its stock has plummeted. At the end of the day, Ford ended up selling more electric vehicles than Rivian this past quarter. Despite the Rivian hit, Ford is still jazzed about EVs: A day after its all-electric F-150 Lightning went into production on Monday, Ford CEO Jim Farley announced that it plans to launch a second electric truck soon.

GM is also going all in on electric trucks — CEO Mary Barra said they are the automaker’s biggest growth opportunity in North America. GM is planning to begin production on an electric Chevrolet Silverado early next year, but hopes to undercut rivals like Ford by focusing on affordable EVs.

Twitter had a rough month

Twitter’s earnings report this week may well have been its last if Elon Musk succeeds in taking the company private.

Twitter actually had a good earnings report overall, despite all the chaos of the past few weeks. Its ad revenue grew 23% to $1.11 billion this quarter, and the number of active users on the platform increased. Though Twitter missed analysts’ revenue estimates, it beat earnings per share estimates. But the platform’s biggest whiff was its disclosure that it had somehow misreported the number of daily active users for three years, which is, well, bad.

Some of this information might not matter if Musk’s deal goes through. He doesn’t care that much for ads, and he has several new ideas for how the company can make money by laying off employees, slashing executive pay and charging for tweets with significance or lots of engagement. The deal is expected to be completed this fall.

Companies are taking a hit from the war in Ukraine

The war in Ukraine was bound to have financial ramifications for tech companies, which have all taken steps to pull out of Russia in some way. The war primarily affected ad revenue for companies like Meta, Snap and Amazon.

Last quarter, Meta experienced its worst day ever after announcing that daily active users declined for the first time. The company made up for those losses a bit this quarter, with an increase of about 30,000,000 daily users. But the decision to cut off Russian advertisers, and the subsequent blocking of most Meta platforms by the Russian government, caused overall revenue to underperform analyst expectations.

Snap and Amazon felt the advertising pain, too. The quarter represented moving through a “challenging environment,” Snap CEO Evan Spiegel said in a press release. Snap estimated that revenue would rise only to 25% by June — less than Wall Street’s 28% estimate. Amazon, breaking out ad revenue for only the second time, also saw disappointing figures. Ads earned the business $7.88 billion, up 25% but below analysts’ expectations.

But despite it, cloud services are still growing rapidly

Many experts were concerned that the war combined with inflation would hit cloud services hard — but that wasn’t the case this quarter.

AWS continues to grow at a rapid pace, maintaining its market dominance. The world’s largest cloud provider zoomed past Wall Street expectations for operating profit by nearly a billion dollars, reaching $6.5 billion. Its operating margin this quarter was 35.3%, approximately 18.4% higher than it was at the end of 2021.

Azure and Google Cloud’s market share remains significantly smaller than AWS, though both companies’ cloud divisions are growing at a more rapid pace. Azure revenue likely jumped about 46% according to StreetAccount, though Microsoft likes to obscure these numbers. The company did say, however, that a segment which also includes other enterprise services, SQL Server and Windows server generated $19.05 billion in revenue, up 26% from the winter. Meanwhile, Canalys estimates that Google’s cloud services have reached $4.5 billion, up 54% from the last quarter — the fastest-growing of all three.

The only cloud company to disappoint was Intel, which increased sales but not enough to meet Wall Street’s expectations. Sales grew to $6 billion, though $6.78 billion was expected, sending stocks down 4% after-hours on Thursday.

No one can do TikTok quite like TikTok

TikTok has proven once again to be a powerful force, but other platforms are still giving short-form video their best shot.

Reels are still a huge priority for Meta-owned Instagram and Facebook, and it’s starting to see the fruits of its labor. Instagram Reels accounted for 20% of the time people spend on the platform, and videos overall make up about half of the time people spend on Facebook. The platforms are using AI to push videos onto users, rather than relying on content from users’ friends and family members.

Both Meta and Google-owned YouTube are realizing that they need to start making money off these efforts. YouTube said it’ll start testing ads on Shorts, while Meta is working to create more opportunities for ads on Reels that are “easy for advertisers to create.” TikTok is clearly prompting these companies to push ads on their short-form video products, as their growth slows.

Metaverse loses money

It’s Meta’s world, and not many people are living in it. The company's Reality Labs division lost almost $3 billion this quarter from working on metaverse initiatives like Project Cambria and Nazare. The company blamed the loss partially on the war in Ukraine, but $3 billion is a hard number to ignore.

Investors are nervous about the amount of money Meta is spending on its metaverse ambitions, but the company is dead-set on pushing it anyway. “The centerpiece of our strategy is the social platform that we're starting to build with Horizon,” Mark Zuckerberg said on an earnings call.

Investors are not the only ones resistant to Meta’s idea of the metaverse. Snap’s Spiegel called Facebook’s metaverse “ambiguous and hypothetical” as Snap pushes its new drone and AR experiences.

Supply chain issues are still a drag — for some

After two decades of growth, the ecommerce behemoth that is Amazon finally showed signs of stalling out. The company reported its slowest sales growth in years on Thursday, with net sales only increasing 7% year-over-year, compared to the whopping 44% increase in net sales that it saw in the previous year’s quarter. The company reported a loss of $3.8 billion. CEO Andy Jassy said the company is working on “improving productivity and cost efficiencies,” but is still challenged by “inflationary and supply chain pressures.”

Apple's earnings tell a similar story. The company’s revenues increased 9%, but CFO Luca Maestri warned that supply chain issues could put a big damper on sales, potentially causing a financial hit of up to $8 billion, with dropping demand in China due to COVID-19 lockdowns. Tim Cook said the company was “not immune” to supply chain constraints.

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