Big Tech companies to cut costs after $77 billion in profits evaporate

Mark Zuckerberg has called 2023 “the year of efficiency.” The founder and CEO of Meta is not alone. This week’s earnings calls and analyst conferences for the five largest US tech companies were filled with talk of austerity and cost-cutting. These are not companies that are doing poorly – Microsoft, Alphabet (Google), Meta (Facebook) and Amazon earned a combined $243 billion in 2022. However, that figure is 24% lower than in 2021. From one year to the next, $77 billion in profits evaporated.

Every one of these companies except Apple has resorted to massive job cuts. The other four companies have announced 51,000 layoffs after a hiring binge in previous years. In addition, companies are cutting back on investments, rationalizing office space, canceling unprofitable projects, and more.

The earnings season has served up a steady stream of bad news. Meta experienced its first annual decline in sales in 2022. Amazon, which had not lost money since 2014, returned to the red after years of relentless profit growth. Alphabet saw its advertising revenue decline for the second time in its history (the first was early in the Covid-19 pandemic). Apple had supply problems due to Chinese factory shutdowns, ending its record profit streak. Microsoft’s profit dropped after growing at the slowest pace since 2016 in the latter half of 2022.

All have taken a big hit due to the strong dollar. These are global companies operating worldwide, and a large part of their revenues and profits come from abroad. With an appreciating US currency, earnings in other currencies are translated into fewer dollars, the currency in which they report their financial statements.

For Big Tech, costs have been rising faster than revenues. Uncertainty about the global economy, which is expected to grow more slowly in 2023, and a potential recession in the United States due to the Federal Reserve’s interest rate hikes are threatening revenue growth. It’s time to tighten belts.

Meta Platforms was the first of the big five to announce massive layoffs and implemented the largest proportionate workforce reduction (11,000 employees, 13% of its workforce). But Meta also had the most convincing austerity message for investors. On February 2, its share price jumped 23% on the stock market after it announced a buyback plan and lowered its 2023 cost forecast by $5 billion and its investment forecast by $4 billion.

After two years of record earnings, the company ended 2022 with a 1% drop in revenue and a 41% drop in profit, to $23.2 billion. Meta has been hurt by erosion in the digital advertising market, stricter privacy rules imposed by Apple, and competition from TikTok. Moreover, its big bet on the metaverse has produced billions in losses and accounting provisions for restructuring costs.

Alphabet, the owner of Google, had four consecutive years of record profits, peaking at $76 billion in 2021. In 2022, its earnings dropped by 21%, although revenues increased by nearly 10% to a new high of $282 billion. In the latter half of 2022, Alphabet suffered from a decline in advertising revenue and a sharp slowdown in growth, in addition to foreign exchange impacts.

CEO Sundar Pichai and CFO Ruth Porat mentioned Alphabet’s revised “cost structure” when they presented Alphabet’s 2022 results. The company has announced 12,000 layoffs for 2023, equivalent to 6% of its 190,000 employees, after hiring 33,734 people in 2022 and 71,000 over the past three years.

Amazon’s first losing year in almost a decade was primarily due to its 17% stake in electric car maker Rivian, which has recently plummeted in value. The company posted a loss of $12.7 billion in 2022 after four consecutive years of record profits and earnings of $11.8 billion in 2021. But the e-commerce giant is facing other problems as well. Operating income is falling due to losses abroad and the lower profitability of the US market. Amazon Web Services, its profitable cloud computing division, has also started to slow down. The company has significantly reduced its workforce over the past year, beyond the 18,000 layoffs it announced.

Microsoft and Apple were the best at protecting their bottom lines, although they have not gone unscathed by the industry’s troubles. Microsoft regained its position as the second-largest US company in terms of profits after being surpassed by Alphabet in 2021. Still, it posted earnings of $67.45 billion in 2022, 5% less than the previous year. The decline is mainly due to the strength of the dollar and layoff severance payments for 10,000 employees, about 5% of the workforce. However, its profit decline accelerated in the second half of calendar year 2022 (the first half of the 2022 fiscal year) due to slowing revenue growth.

Apple remains the undisputed Big Tech profit leader but weakened as the year progressed, suffering its first revenue decline in three and a half years during the last quarter of 2022 (the first quarter of its new fiscal year). Strict Covid-19 restrictions in China weighed down Apple’s sales when the company couldn’t get enough of its flagship product, the iPhone, to customers during the holiday season. This caused a 5% drop in Apple’s revenue to $117 billion and a 13.4% drop in profit to $29.9 billion during the crucial final quarter of 2022. Due to this setback, Apple’s 2022 revenue grew by only 2.4%, and its profit fell by 5%.

For the first time in at least a decade, all five major US tech companies experienced profit declines in 2022, primarily because of strategy shifts and operational miscues. But 2022 may also signal the end of a golden era of revenue and earnings growth for the entire industry.

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