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The Sky is Falling for Digital… or Is It? Big Tech’s Earnings Q2 2022 (Thinks Out Loud Episode 357)

Two men looking at graph of stock prices on computer monitor to illustrate Big Tech (the AGFAM's) earnings season

It’s earnings season once again. And, as always, we’re taking a look at what Apple, Google, Facebook, Amazon, and Microsoft — the AGFAM; Big Tech — have to say about the state of digital. If you only look at the top-line though — missed forecasts, big pullbacks in digital ad spend, hiring slowdowns — you’d think the sky was falling for digital. But is it? Or is something else going on here?

This episode of Thinks Out Loud uses the AGFAM’s earnings calls to take a look at the state of digital. We’ll look at whether the sky is falling for digital… or not. We’ll explore the underlying trends that matter for the AGFAM and for your business. And we’ll help you understand what’s really — and what you can do about it.

Want to learn more? Here are the show notes for you:

The Sky is Falling for Digital… or Is It? Big Tech Earnings Q2 2022 — Relevant Links and Show Notes

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Past Insights from Tim Peter Thinks

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Technical Details for Thinks Out Loud

Recorded using a Heil PR-40 Dynamic Studio Recording Mic and a Focusrite Scarlett 4i4 (3rd Gen) USB Audio Interface into Logic Pro X for the Mac.

Running time: 28m 24s

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Transcript: The Sky is Falling for Digital… or Is It? AGFAM Earnings Q2 2022

Well, hello again, everyone. And welcome back to Thinks Out Loud, your source for all the digital expertise your business needs. My name is Tim Peter. This is episode 357 of the big show, and I think we have a really cool episode for you this time.

Big Tech — the AGFAM’s — Earnings are Here. And They’re Kind of Ugly

It’s earning season once again, and so the AGFAM, Apple, Google, Facebook, Amazon, and Microsoft are talking about all the money they’ve made and all that. Oh, except this time, yikes, the sky is falling. If you’ve been paying any attention to what’s been going on with earnings season it’s been slightly ugly compared to what most people expected. And I want to tell you that I don’t want to make jokes, we’re in a weird economy. I mentioned that on a episode a couple of weeks ago. Things are definitely a little strange right now. What I also want to tell you is that there’s really so many silver linings in the clouds that the various AGFAM companies have talked about, and I think it’s really worth noting that. So it’s not really that the sky is falling, there’s some bad news in here, but there’s way more interesting news than bad news. And so that’s what I want to talk about today.

This is Not Stock Advice

One of the reasons that I do this is not to provide analysis of the stocks, or even the companies themselves. Instead, I think it’s really important we pay attention to what Apple and Google and Facebook and Amazon and Microsoft, and some other folks, I’m going to talk about Spotify a little bit today, what they say, because these large players are your biggest competition. Also, often they are your most important marketing and distribution channels. They are both your competition and a partner. Finally, where they put their money tells you a lot about what they think is important. By looking at all of them you can start to get a clearer picture of where the digital ecosystem will be 3, 6, 9, 12 months down the road.

If every one of these companies is talking about the same thing it’s probably a trend worth watching. If they’re talking about different things, well, then you have to go looking for additional insights and data to show which of those are more important, but it’s definitely some interesting trends that we’ve seen across the board. By the way, I’m going to give all of their numbers. To some degree or other everyone did better in constant currency because there were some foreign exchange things going on when we talk about year on year. I’m not going to bother with any of that. Again, this isn’t to analyze the stock, this is to say what trends can we discern from what they’re talking about?

Apple’s numbers: Solid

I’m going to start with Apple and I’m only going to touch on them for a minute because they called out a couple of interesting things that we will come back to, and that you’ll hear more and more from the other people, but theirs was pretty straightforward. They had an $83 billion quarter. I mean, a massive, massive number. Up 2% year on year.

Apple’s advertising business struggled. They noted that services, "Like digital advertising were clearly impacted by the macroeconomic environment." And hang on to that idea, because we’re going to come back to that a lot over our time together today.

Augmented reality is here. They also talked about augmented reality, and to a lesser degree, virtual reality, by saying, and this again is a quote from Tim Cook, the CEO. He said, "We are thrilled right now to have over 14,000 ARKit apps in the App Store. And they’re providing incredible AR experiences for millions of people that’s utilizing iPhone and iPad. And of course, we are in the business of innovation so we’re always exploring new and emerging technologies." He’s talking about whether or not they might do some sort of AR glasses or the like. He didn’t say they would. He just said look, we’re a technology company. That’s what we do, so hang on to your hats because maybe down the road it will happen. Anyway, that’s all we really need to say about Apple for the moment.

Google’s numbers: Also solid

Google had a solid quarter, $70 billion in revenue, 16% year on year growth. That is a big drop in growth rate from last year. But 16% growth on a $62 billion quarter a year ago is a metric crap ton of money. That is not nothing. Less than 1% margin growth, so their margin was worse. Couple of things to keep in mind, Google still makes 90% of its revenues from advertising. If you want to put it in glass half-full terms, they make only 58% of its revenues from search, but they remain a one product company. Cloud and other bets still operate more or less at a loss. Technically, more than 100% of their profits came from advertising. They’re slowing down hiring. They’ve grown by 30,000 people in the last year. They added 10,000 new folks in just the last quarter, so that’s a lot.

Advertising is slowing down a bit. What is interesting is it’s a sign, what we’ve seen in Google’s numbers, that advertisers are pulling back somewhat after two years of huge investment. We’re going to talk more about that as we go forward.

But Google continues to invest in innovation. Google did spend a lot of time talking about their innovations. They talked about how people are using Google Lens to do visual searches more than 8 billion times per month. That’s billion with a B. Now to be fair, Google typically gets about 5.6 billion searches per day. So Lens does as many searches in a month as regular search does in 34 hours. But 8 billion of anything is a fairly large number. I mean by contrast, Bing only does about 900 million searches per day. So Lens is doing roughly 30% of all of Bing’s volume every single month. That’s pretty incredible. That’s pretty incredible. That’s a real achievement for them.

They talked about 3D images for merchants. Again, another augmented reality (AR) type of thing. They talked about their AI-driven translation. This is crazy. They’ve added 24 new languages to Google translate in just the last year. They’ve introduced real-time translation and transcription in your line of sight. Again, another AR use case that I think we’re going to see a lot more of. So, some really fascinating things there.

Facebook’s numbers: Not good

If we look at Facebook, Facebook had an abysmal quarter. Their revenues were $28.8 billion. Now that’s a huge number, except it was down from $29.1 billion last year. It was the first time in the history of their company that their quarterly revenues dropped. It’s never happened. Their user numbers grew a tiny little bit. They’re 1.97 billion. Daily active users up from 1.96 billion. I mean, that may not sound like a lot, but it’s 10 million users. That’s a 3% increase on almost 2 billion users. That’s not nothing.

Again, advertising is the culprit. Like Google, Facebook makes pretty much all of its money from advertising, and most of that in all likelihood from mobile. $27 billion of its total revenues were ad revenues, so 96% of all its revenues. As I just mentioned with Apple and Google, a lot of that is just because people are not advertising as much as they were. Now, as much as their stock got pummeled, they’re not really hurting.

But, they made a lot of money… and invested to support their ambitions. Their net income was seven and a half billion dollars, which just, as I said a moment ago, that’s not nothing. And if you exclude their ambitions, which we will talk about in a moment, they had operating income of 11-and-a-half billion dollars. They just lost $3 billion on everything else they did. That’s actually a key takeaway that we’re going to come back to in just a moment.

Amazon’s numbers: Not too shabby

If we look at Amazon’s numbers, they had a 7% increase in net sales to $121 billion. Again, not a horrible number, especially when we’re talking about over $100 billion in revenue, but obviously people expected them to do a lot better than $7 billion. Almost $20 billion, $19.7 billion, for Amazon Web Services in the quarter. An annualized run rate of $79 billion. That is a big, big number and points to one other trend that we’re going to talk about.

And their head count growth blew me away. They are up 188,000 people year over year and "Nearly double the headcount of what we had heading into the pandemic in early 2020." That is huge headcount growth. I mean just very, very hard to get your head around.

Microsoft’s numbers: Fairly strong

And if we look at Microsoft, $51.9 billion, up 12%. Half of that is in Microsoft Cloud. As with Amazon, with AWS and to a lesser degree, Google with Google Cloud platform, they’re benefiting from other companies shifting to digital. I think that’s really something we’re going to talk about in a moment, something really to watch.

Artificial intelligence innovations. They talked about AI and how their GitHub copilot is the first of its kind artificial intelligence pair programmer, so it helps developers write better code faster. They’ve gotten 400,000 people to sign up for that. I talked about this, well, a few years ago in an episode where I said, "AI, won’t take your job, but smart people who use AI will." This is what it looks like.

"Hybrid work is now just work." Satya Nadella, as he often does, had the quote of the quarter when he said, "Hybrid work is now just work." They’re saying how they’re benefiting from work from anywhere with their tools that allow people to collaborate the like, whether it’s Teams, whether it’s the way Office 365 works, et cetera. It enables people to work from anywhere, so that’s pretty cool.

Advertising took a hit, of course. They saw a slowdown in ads, just like everybody else who sells ads. In Microsoft’s case that’s mostly on LinkedIn, and though they don’t break it out separately, Bing. The point is, that as noted already, it’s a weird economy and advertisers are being much, much more cautious about what they do here.

One other thing that I thought was fascinating is that LinkedIn also makes money on job listings and things like that, and Microsoft is seeing a slow down in hiring that affects those numbers. That’s a much more interesting statistic than for instance, Google pausing hiring a few weeks ago. So I’ll probably check out the earnings call from Indeed’s parent company, Recruit Holdings, in a couple of weeks to see if there’s any broader trend there that we need to pay attention to.

But digital remains strong. One other quote that I always love, Satya Nadella has made this point before, that as a percentage of GDP, "IT spend is going to increase because every business is trying to fortify itself with digital tech to, in some sense, navigate this macro environment." The shift to digital continues, and we will talk about that more in just a second.

Shopify’s numbers: Not great

The last company that I’m going to talk about from an earnings’ perspective was Shopify. You probably saw they had a bad quarter. 16% year on year revenue growth compared to huge double digit growth the last couple of years during the pandemic. Gross merchandise volume was only up 11% year on year. That’s still off a base of roughly $42 billion. If I told you you would grow sales by 11% next year off a base of $42 billion, you’d probably be pretty pleased.

Why Layoffs Suck for Everyone. Wall Street was expecting a better quarter, and Shopify got pummeled pretty hard. That led Shopify to laying off about 10% of its workforce across the organization.

This is a real drag. As much as I like to have fun talking about this stuff, layoffs always suck. First, for the people who are let go it’s just a terrible, terrible experience. It’s tough to lose your job. They’re also not great for the people who don’t let go. Survivor’s guilt is a real thing. It’s also common for those who remain to worry that it’s just the first of a series of layoffs and that they might have to look over their shoulders, being worried about their jobs. And because of that, it can really hurt productivity, which makes it not great for the company. So layoffs are a lose, lose, lose. They’re bad for the people who get laid off, they’re bad for the people who don’t get laid off, and they’re bad for the company overall, even if it’s to make the company healthier in the long run.

We used one of the layoffs I participated in in a company I worked for a couple years ago, honestly, as an opportunity to let go of some generally poor performers. And even then it was still a sad day, and it was still a distraction. People who don’t do a great job, unless they’re also just terrible human beings, which usually isn’t the case, have friends in the company and people who like them and people who’ll miss them. It’s a big, big distraction from doing the job at hand, and no one is happy for a while. I don’t think Shopify did this lightly, took this action lightly, and I do think it’s going to distract them for a little bit just because it always does.

A silver lining? They did have some good news. They talked about 47% year on year growth in offline GMV. They’re providing tools to companies who sell in stores and the like. We’re seeing the move in traditional retail and making digital transformation of retail more of a reality. They have a new YouTube store tab to connect commerce with video. Again, this all feeds into this idea of its all eCommerce.

**"Customer Experience is Queen" in the real world. **And they talked about how customers using the company’s fulfillment network, Shopify Fulfillment Network, or SFN, have gone from 2% of orders being fulfilled in two days or less to 70% over the last year. Now you’ve heard me say many times that customer experience is queen. There’s a real takeaway, I want you to be aware here, that doesn’t fit into the larger narrative, which is why I’m spending time on this now. They’re both delivering on customer expectations of quick delivery and increasing the likelihood that customers will expect that kind of speed from everyone else. That’s a big deal, and something you will need to pay attention to for your business as we go forward. When I talk about "marketing at the speed of digital" and "delivering at the speed of digital," this is what I mean.

What Trends Do You See in the AGFAM’s Earnings?

Well, let’s break down some major trends in here.

Wall Street is not the economy. First, I cannot emphasize enough that Wall Street is not the economy. We’re in a weird economy, but just because some of these stocks got hit hard or Wall Street expected larger growth than anyone got is besides the point. It might be slower growth, but it’s still growth. It isn’t declining business, with the exception of Facebook, which we’ll come back to in a minute. This really is only a problem if you’ve invested as a company in higher growth than you’ve achieved. As Shopify said, we overshot our prediction, which is what led to the layoffs. That’s a bad thing. I’ve done it once or twice in my career, and seen plenty of companies do it. It’s never fun because you sometimes have to pull back on certain things or cut investment on certain things, or as Shopify did, have to let some people go, which is never a good thing.

All of the companies that I looked at in this episode though, with the exception of Facebook, brought in more revenue in the most recent quarter than they did a year ago. And all of those revenues were built on top of massive, massive revenue bases. Q2 last year was a monster quarter for pretty much all of these companies, and the specific challenges that Facebook is having are isolated to them.

Digital continues to grow. So we really are living in a world where digital continues to grow. Digital continues to be where the economy is going, and where these businesses are going, and where your business is going. As I said, the economy is at best weird, at worst it sucks. But digital is the thing that’s actually moving us forward.

You don’t want to make all your money selling ads. Another big takeaway is you really don’t want to make all your money selling ads. Facebook did terribly by their historical standards, and Google had a mediocre quarter by Wall Street standards. And Apple and Microsoft and Amazon didn’t do as well in any part of their business where they did sell ads. But if you’re listening to this podcast, you’re probably more of an ad buyer than an ad seller, so you’re probably going to be okay there. I wouldn’t read too much into this.

Selling picks and shovels is a great way to make money in a gold rush. Another big trend worth noting of course, is that all of the companies who are helping other companies move to digital did really, really well in those areas. Microsoft, Amazon with AWS, Google with Google Cloud platform, Apple with its App Store all did really, really well. Digital is where all of your competition is putting their emphasis, and that’s why the big guys are benefiting because they’re the folks people are spending money with to do digital more effectively.

Despite tough times, the tech giants continue to invest strategically. The other huge takeaway I want you to pay attention to is that all of the big players, despite troubling economic times and weird economy and all that kind of stuff, continue to invest in strategic areas. There’s no guarantee all of those investments will pay off, but they’re not sitting on the sidelines. As I mentioned earlier, Facebook could have had a great quarter if they weren’t willing to take a huge bet on the future of VR. They are spending huge, huge sums of money. They blew $3 billion this quarter on making sure that AI is a bigger part of what they will do, making sure that they have huge ambitions for VR, for Horizons World, for the Metaverse, all of that kind of stuff.

A couple of really remarkable quotes in their earnings call. Mark Zuckerberg said, "Later this year we’ll release a higher end headset code named Project Cambria, which will be more focused on work use cases and eventually replacing your laptop or work setup." They’re not talking about games. They’re not talking about conferencing. They’re saying this is going to replace your laptop. I’m going to give more of the quote here because he said, "This premium device will have improved ergonomics and full color pass through mixed reality to seamlessly blend virtual reality with the physical world. We are also building in eye tracking and face tracking so that your avatar can make eye contact and facial expressions which dramatically improves your sense of presence."

The metaverse is still a ways into the future. Now, I mentioned that they are investing big and they’re taking a big bet here. They don’t expect this to happen overnight. Again, another mark Zuckerberg quote. "This is laying the groundwork for what I expect to be a very exciting 2030s when this is sort of more established as the primary computing platform." I talked about this when I talked about how much will 2022’s top trends affect you, and I said, not much. He’s talking about things that are seven and a half years away. That’s not that long; it’s also not tomorrow. And he’s willing to take an annualized $12 billion a year loss to be ready for that.

Obviously they are the poster child for this, but all of the big players are investing. Amazon has doubled its workforce. Shopify is still investing in new technologies to make commerce happen for all kinds of businesses. Microsoft is investing in AI and VR. Google is investing huge amounts in AI, specifically so that they can do things like translations, so that they can do things like Google Lens, so that they can do things like "MultiSearch," where you can ask questions about a picture you took. They’re not sitting on the sidelines, and what it means is that digital is far from over. Sure, it’s easy to see poor earnings results or see Wall Street punish these companies for not having great quarters, but that’s missing the forest for the trees.

Digital is making remarkable progress. We are making remarkable progress. Yeah, it’s possible that any one company could fail. I’m not going to bet on any one of these companies making it or not making it. But if you look at the larger trends, it’s insane where we’re going. We should expect to see continued innovation and continued massive innovation over the next decade. Sure, it’s a shame for Facebook that it might take that long for it to pay off, but they’re willing to play a long game to make that happen. That’s incredible, and something we really ought to acknowledge as saying this is something that we’re really going to benefit from in the longer term.

Privacy is now table stakes. Now you’ll note I didn’t talk about privacy. It is a big trend, but I just did a full episode about that a few weeks ago and don’t really have a lot to add to the boat. But there’s nothing new for me to say, when there is, I’ll let you know.

The Sky is Falling… or Is It? Conclusion

The major takeaways here though are:

  1. Yes, it’s a weird economy, but the large players continue to invest.
  2. Yes, digital is alive and well. The sky is far from falling. Digital is far from over.
  3. You will benefit by continuing to invest and continuing to focus on your digital transformation, on your digital growth, on your business and how you use digital to reach your customers, wherever they happen to be, so that you’re going to be in really great shape too, regardless of what happens in the economy.

What did I miss? What did you see that you thought was really interesting? I’d love to hear from you. Make sure you drop me a line at podcast@timpeter.com and I’ll make sure I call out some of the answers I get from some of you over the next handful of weeks.

Show Wrap-Up and Credits

Now, looking at the clock on the wall, we are out of time for this week. As always, I want to remind you that you can find the show notes for today’s episode, as well as an archive of all past episodes, by going to timpeter.com/podcast. Again, that’s timpeter.com/podcast. Just look for episode 357.

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Don’t forget, you can click on the subscribe link in any of the episodes you find there to have Thinks Outs Loud delivered to your favorite podcatcher every single week. You can also find Thinks Out Loud on Google Podcasts, Apple Podcasts, Stitcher Radio, Spotify, Overcast, wherever fine podcasts are found.

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Show Outro

Finally, I want to say a personal word of gratitude to you. I know I say it every single week, I would not do the show without you. It just means so much to me that you take time out of your valuable day, out of your valuable week, out of your valuable life to spend some time with me each week. So I hope you are well. I hope you have a great rest of the week. I hope you have a wonderful weekend and I will look forward to speaking with you here on Thinks Out Loud next time. Until we’re together again, please be safe. Be well. And as always, take care everybody.

Tim Peter is the founder and president of Tim Peter & Associates. You can learn more about our company's strategy and digital marketing consulting services here or about Tim here.

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