Big Tech falls short in the first salvos of the Q3 earnings cycle

If you are a believer in the endless concentration of corporate power, the work of major tech companies to extend their reach into all areas of the digital economy must bring you joy. If you are more in favor of upstart companies attacking and bringing to heel incumbent wealth by the (figurative) sword, it’s probably less welcome. Big Tech companies, once they reach a certain scale, often have the wealth and influence to buy, build or bury their smaller competition.

But no matter on which side of the platform wars you stand, the sprawl of the major tech companies means that they regularly off-gas a plethora of statistics that we can use to better understand the world. Given the ever-changing state of the world’s economy this year, the information that Big Tech earnings provide is even more important than usual.

As we noted earlier this week, TechCrunch+ has several questions that we want to be answered during this particular earnings cycle, and yesterday, thanks to Alphabet and Microsoft, we can begin to remedy our own queries. Today, we’re talking through the advertising, enterprise software, cloud and consumer-related inquiries.

The Exchange explores startups, markets and money.

Read it every morning on TechCrunch+ or get The Exchange newsletter every Saturday.

For broad-based looks at how Google etc. and Redmond fared in aggregated numerical terms, head here and here, respectively.

That aside, we can get into what we want to know. Note before we start that we are examining Q3 results from the companies by question, rather than individually. To work!

Advertising: Mostly bad news

Given how investors reacted to Snap’s recent earnings report, you might not have expected great news from Google’s advertising business. (Alphabet is the holding company that owns Google but is more thin wrapping paper around the search and video giant than a real parent entity. We’re gonna use “Alphabet” and “Google” interchangeably here.) What we got might have missed even your low expectations.

Advertising revenues from Google’s search business grew from $37.926 billion in the year-ago quarter to $39.539 billion in the most recent (+4.25%). The news gets worse from there. YouTube advertising revenues fell on a year-over-year basis from $7.205 billion to $7.071 billion (-1.86%), while revenues from Google’s larger network of sites fell from $7.999 billion in Q3 2021 to $7.872 billion in Q3 2022 (-1.59%).

The historically advertising-powered juggernaut that Google has proven to be has hit a wall, it appears. Sure, Alphabet had some weird pandemic-impacted quarters, but this is different. Still, the company has lots of optimism about the future. Here’s Alphabet’s chief business officer, Philipp Schindler, during the company’s earnings call, per a Fool transcript:

[A]s I mentioned, there was a further pullback in spend by some advertisers across both brand and direct response. But overall, I feel YouTube remains in a really good position to continue to benefit from the streaming boom. In direct response, we think there’s a lot of room to run to make [ … ] YouTube more shoppable, more actionable from video action campaigns to product feeds, app campaigns, live commerce features.

On the other hand, Microsoft’s smaller search business did … just fine? Here’s Microsoft:

Image Credits: Microsoft

Xandr, as a reference, is the advertising division that Microsoft bought from AT&T in late 2021.

While advertising is a proven cash cow for Big Tech in general, Google’s lackluster results far outweigh Microsoft’s more positive notes. The ad market is bad for Big Tech, which we presume means that startups eating off of similar incomes are on restricted rations.

Enterprise software: Just fine

Here we swap focus from Google to Microsoft. From a host of data points, the most important for our purposes is Redmond’s “Productivity and Business Processes” group, where its Office-based subscription products live. Inside this business segment, Microsoft reported $16.47 billion of revenue (+9.51%) in its most recent quarter. That was a few hundred million more than the street anticipated.

The growth rate for the Productivity team at Microsoft would have been more like 15% without currency fluctuations, but we aren’t in the mood for such curved grading. Microsoft leverages its U.S. headquarters to its advantage, so we shouldn’t allow for the downsides of the same (the strong dollar comes for everyone) to be discounted in our math.

Growth in the number of commercial seats of Office 365 came in at 14% in the quarter, measured on a year-over-year basis, flat from the sequentially preceding quarter but down from 17% growth in the year-ago period. That result feels fine. (Office 365 is the subscription-based successor to the traditional Office suite, which is being branded to Microsoft 365.)

Adding a bit more context to the figures, analysts asked Microsoft about previously noted SMB weakness, and if they were seeing something similar more recently in the enterprise segment. Here’s Microsoft CFO Amy Hood, as transcribed by Fool:

[The recent Office/Microsoft 365 renewal rate] speaks to, I think, the value people are seeing in Microsoft 365. We had on-time renewals that were frankly better in Q1 based on expirations than we’ve seen a year ago. So deals are both getting done and I think getting done on time. They’re getting done within a discount range that we feel good about.

That’s consistent. And we saw a good upsell to E5 [the most expensive Office 365 tier]. So if you think about that as sort of forming the basis of what are we seeing above SMB, that’s a good summary. Where we, in fact, I think we’ve talked about it, new deal moderation, and I referred to that, frankly, in Q4 as well — it tended to be in, to your point, the smaller end of the market, small to mid-sized companies.

Our vibe that the enterprise sales market is fine seems to fit neatly with Hood’s comments. This is good news for the myriad SaaS startups out there, as it implies that their market has not dried up and blown away but instead is staying at least mostly fecund.

The cloud: Cause for optimism

“The cloud” is a squishy term. In this case, we mean public cloud infra, so we’re talking about Google Cloud and Microsoft’s competing Azure product. Recall that both are scrapping to either retain (Microsoft) or earn (Google) second place in this key market that Amazon’s AWS service currently leads. Here’s what we know from each company:

  • Google Cloud revenue grew from $4.990 billion to $6.868 billion year-over-year in Q3 2022 (+37.64%).
  • “Azure and other cloud services” grew 35% in the same calendar period.

The Google Cloud number beat analyst expectations, while Azure’s growth came in a little bit light compared to the same.

There is some cause for optimism here. Redmond noted that some use cases for public cloud resources are scaling rapidly. Per the same Fool transcript once more, here’s Microsoft CEO Satya Nadella on his earnings call: “Azure ML revenue has increased more than 100% for four quarters in a row.” That’s bullish.

The public cloud story appears to be one of slowing growth, but from such huge revenue bases (Google is in third place today, mind) that it almost seems immaterial that Microsoft missed a little.

Still, slowing overall cloud growth implies at least a little that smaller tech companies, including startups, are perhaps not growing as fast as they were. In some slanting way, I consider public cloud spending to be a key indicator for the health of the software market, akin to GDP for national economies, if less inclusive.

Consumer health: A “pullback”

The changing health of the U.S. consumer is impacting the global economy. Which means that the same changes are also making waves in Big Tech earnings.

Microsoft cited “cyclical trends affecting our consumer business” in its earnings call, adding the following (emphasis: TechCrunch):

In our consumer business, PC market demand further deteriorated in September, which impacted our Windows OEM and Surface businesses. And reductions in customer advertising spend, which also weakened later in the quarter, impacted search and news advertising and LinkedIn Marketing Solutions. [ … ] Our outlook has many of the trends we saw at the end of Q1, continue into Q2. In our consumer business, materially weaker PC demand from September will continue, and impact both Windows OEM and Surface device results even as the Windows installed base and usage grows[.] [ … ] In Office Consumer, we expect revenue to decline low to mid-single digits as Microsoft 365 subscription growth will be more than offset by unfavorable FX impact.

Separately, Google noted in its call that advertisers had retreated in a number of categories, including “in financial services, [a] pullback in the insurance, loan, mortgage and crypto subcategories.” This should not surprise, given rising rates and a lackluster crypto market more generally, but it is nice to get the confirmation.

Finally from the consumer perspective, gaming. Microsoft’s Xbox and related revenues fell 3% in its most recent quarter, which didn’t light our hair on fire with excitement.

A bold summary: I’d hazard that the enterprise — or business, more generally — customer is healthier on average than the consumer. That means that B2B startups should have an edge in the coming quarters when it comes to in-market performance; that, in turn, should be reflected in future venture totals that we see from Q4 2022 onward. At least until the consumer stops getting buffeted by central banks and a vulnerable macroeconomic environment.