Five questions to consider ahead of Big Tech’s Q3 earnings


Image Credits: Nigel Sussman (opens in a new window)

Today after the bell, Alphabet and Microsoft will report their calendar third-quarter financial results. Given the breadth of industries that each of these companies touch, their performance will provide us with rich data concerning different areas of the technology landscape.

The fun will continue tomorrow when Meta reports its own results. And later this week, we’ll hear from Apple and Amazon, completing the “Big Five” technology earnings reporting cycle in just a handful of days.

Get ready for a blizzard of numbers.

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Most folks don’t love reading earnings reports, dry documents that are an odd combination of canned CEO-speak and raw numbers. The proffered executive commentary is too pre-chewed to mean much, and numbers are just that: figures on a page.

To help you cut a useful line through the upcoming numerical flurry, I’ve detailed below five questions that TechCrunch+ wants to answer in the coming days. Our queries are centered around issues that impact startups, so we’ll relate each question and its supporting data points back to upstart tech companies.

Sound good? Let’s have some fun.

Five Big Qs for the Big Five

We’ll start with advertising, check in on enterprise accounts, riff on the state of the consumer, talk through cost-cutting — something that has been in the news this week — touch on results, and then look toward the future.

Is the ad market that bad?

Snap’s early earnings report landed with a massive thump as the social company’s valuation cratered. Investors were spooked by slowing growth and a lack of guidance regarding Q4, crossed with a massive net loss. Sure, Snap had some good news in the mix, including a modestly improved adjusted gross margin, but it was clear that without a better growth story, investors were simply less interested in holding its stock.

Just how bad is the ad market? Are Snap’s woes its own, the risks of being a smaller player in a market that behemoths call home? We’re going to find out.

Big Tech earnings are partially built on the back of advertising incomes. As we’ve discussed on The Exchange before, as tech companies grow, their advertising business footprint does as well. We can see this happening with startups as Instacart looks to ad-based incomes to keep its growth story humming. For companies like Microsoft (search ads, etc.), Apple (now building its own advertising empire after hammering Meta and others), Meta (nearly entirely ad based), Alphabet (also ads) and Amazon (one of the largest advertising players online), a weak ad market could slow growth at the majors.

Our perspective for startups here is relatively simple: If the largest platforms are struggling to generate ad incomes at the pace investors expect, smaller companies (startups) are likely in even more trouble. Ads aren’t how most startups monetize today, but they do matter.

What’s the enterprise software market looking like?

Most startups build software, and most software startups sell their wares on a recurring basis, with only a strong minority preferring to sell on a more on-demand basis. No matter the sales model, the health of the business software buyer is a key data point for us as we work to understand how startups are faring in the current business climate.

Inside the rapid rise of usage-based pricing

While slightly less widespread than ad-based incomes at tech majors, a large fraction of total Big Tech revenues is generated from enterprise software sales. We’ll be able to parse from their results the health of the enterprise customer (Microsoft’s business software sales) and overall cloud load (AWS, Azure, Google Cloud), which should give us a clearer indication of the health of tech buying apart from, say, more generalized GDP growth.

The better Big Tech does here, the stronger we can infer the market is for startups selling hosted code. Which is, as we noted, most startups.

How strong is consumer demand?

The other side of the enterprise question involves the consumer. Regular folks buy hardware, software and content services from Big Tech companies that are at times also sold by smaller technology concerns. Sure, the smartphone and PC markets are reserved for a handful of players, but startups also sell gadgets, code and digital media to consumers just like the biggest companies.

From surviving to thriving as a hardware startup

Here we will learn lots from the Microsoft legions building Surface and Xbox devices, Amazon’s own hardware results and whatever we can glean from its streaming business, and Apple’s massive consumer hardware and services business. Enterprise software demand and the health of the consumer won’t be easy to tease out, but from the upcoming web of datapoints, we should be able to chart a through-line or two.

How much cost-cutting can we see?

It’s no news that tech companies are looking to trim costs, but it is interesting that major investors are writing public notices begging major tech companies to please spend less. Given the climate of yes, cuts from tech companies and “even more cuts, please from investors, how the largest American tech companies speak this week matters.

Noom lays off more employees amid CFO departure

Sure, we can look at the cost bases of Big Tech, but more important in this case will be announcements of changes to staffing (layoffs, hiring freezes, etc.), and commentary provided to analysts during post-earnings calls.

How much do the biggest companies promise? Whatever they do, expect that startups will need to double that. After all, smaller companies lose money while the biggest tech shops weep gold.

Are mixed quarters a valuation death sentence?

This is a bit tricky to explain, but hear me out. A mixed quarter is when a public company will report either revenue or profit above expectations set by analysts but will disappoint on the other. Growth may be slower than expected but net income higher. Or, revenue might come in high compared to analysts’ estimates, but at the cost of profits. Mixed quarters can be received well or reviled depending on the context and forward posture of the company.

Naturally, we may not learn a singular lesson from any mixed quarters this week, provided that we do get some (I would be shocked if we got none). But we mostly want to get a general feel for what happens when a company misses on growth (revenue expansion), but reports better-than-expected profits (net income, adjusted EBITDA, free cash flow).

Why? Because there’s been a vibe that startups should accept marginally slower growth rates in exchange for hugely discounted burn rates. Is that argument based in reality? Do public markets agree?

Outlook (featuring fears, inflation)

We also have our ears open for how fears are discussed. How much macro uncertainty is there in the market? How much are these companies worried about rising rates? Inflation? Geopolitical conflict? A tech war between the United States and China?

Given how much chaos the world is in today, we’re collating all the data we can to get the clearest possible image of the world as it is. More when we get the reports.

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