The tech industry is cutting headcount, showcasing its commitment to earnings

The fourth quarter discussions were dominated by recession fears as one company after another announced redundancies. Even cloud revenues were not immune, as the macro headwinds cast a shadow on the outlook. From a trends perspective, artificial intelligence (AI) featured prominently in most calls as a technology too hot to be ignored. We have no doubt that AI will emerge as a key growth driver for the sector for years to come, but the current horizon is focused on exploration.

The EY Technology Quarterly analyzes the issues addressed by key global technology company leaders during the earnings calls reviewing the results of the most recent quarter. Below are the key themes for 4Q22:

1. Redundancies featured in nearly every call

We heard discussions about headcount reductions across the entire sector, which could be interpreted as a sign of a broader industry right-sizing.

Two quarters ago, tech companies talked about hiring slowdowns to match the speed of talent inflow with the slower, post-pandemic growth levels. It is, therefore, no surprise that companies started to reduce headcount, but we don’t think the current wave of redundancies corresponds with the state of the economy. Of course, companies are suffering from uncertainties and macro headwinds, which can be severe in certain end markets. However, in some markets, competition is heating up, requiring companies to clean up their portfolio or undo overhiring that happened during the pandemic. Longer term, growth in the sector will return as technology’s role in businesses and societies will expand further in the future. We, therefore, think that the redundancies will not spell the end to talent shortages in the industry anytime soon, but they are a clear message from the sector to investors that companies will not shy away from redundancies to honor their earnings commitments.

2. Cloud computing growth engine sputters

Companies talked about the pressure on their cloud revenues due to macro headwinds, which we believe proves that the industry is maturing.

In response to an economic slowdown, companies will optimize their cost structures and streamline their operations. This used to be good news for cloud vendors, as companies could easily boost their cost-saving efforts by moving more workloads to the cloud. However, during the fourth quarter, cloud workloads themselves have also been targeted for cost reviews, given the visibility of these expenditures. Companies have scaled down projects and re-evaluated existing contracts, postponing expansions until additional capacity is required. As cloud software vendors are affected, so are the infrastructure vendors. This has led to a slowdown in growth as it trickled down the value chain. However, the cloud’s long-term appeal remains intact, even though migrations will become more complex due to the low-hanging fruits being picked first. We do think that as the industry matures, cloud vendors will have to increase their ambitions to keep revenues growing.

3. Artificial intelligence is a red-hot technology focus

During the quarter, AI was too hot a trend to ignore, and we expect an acceleration of product launches leading to a flurry of legal and ethical issues.

Technology companies, pressured by competitors, were very keen to present their advancements in AI technologies. Generative intelligence stole the limelight, but other application areas include decision support and autonomous systems. Tech companies discussed major milestones, inflection points and game changers in their businesses. They highlighted AI-infused service offerings for customers and AI tools to improve or automate internal effectiveness. With companies prioritizing investments in AI, we expect the number of product launches in this space to increase over the next quarters. At the same time, we acknowledge that the application of AI as a technology comes with legal and ethical issues over data ownership, privacy and fake news that need to be addressed for the technology to become generally accepted.

Authors:

Ken Englund, EY Americas TMT Industry Market Leader

Stephan van Rhee, EY Global Technology Sector Analyst