Connect with us

Published

on

Microsoft CEO Satya Nadella, right, speaks as OpenAI CEO Sam Altman looks on during the OpenAI DevDay event in San Francisco on Nov. 6, 2023.

Justin Sullivan | Getty Images

Microsoft‘s massive investment in OpenAI is weighing on earnings.

Following Microsoft’s quarterly earnings report on Wednesday, CFO Amy Hood said she expects the company to take a $1.5 billion hit to income in the current period, mainly because of an expected loss from OpenAI.

Microsoft has invested close to $14 billion in OpenAI, whose ChatGPT assistant has gone viral and inspired a whole new industry called generative artificial intelligence. The trend has generated billions of dollars in new revenue for Microsoft.

But OpenAI is losing bundles of cash. The company expects $5 billion in losses this year, before stock-based compensation, on $4 billion in revenue, The Information reported earlier this month, citing documents.

Hood said that for Microsoft, the loss is accounted for under the equity method. The accounting approach refers to a company’s share of the invested company’s profit or loss in a given period, a Microsoft spokesperson said.

The additional detail is “not due to a change in our partnership or investment in OpenAI,” the spokesperson said in an email. “Our partnership with OpenAI continues to deliver results, as we build differentiated IP and drive revenue momentum.”

The earnings call came after Microsoft reported an earnings and revenue beat for the fiscal first quarter. However, the stock slid in extended trading after the company’s forecast called for slower-than-expected growth.

While OpenAI is a central part of Microsoft’s growth strategy, the company has been hedging its bets after integrating OpenAI’s models into several products and acting as the startup’s exclusive cloud infrastructure provider. On Tuesday, Microsoft’s GitHub subsidiary said it would allow developers to power the Copilot Chat feature with models from Google or startup Anthropic instead of OpenAI’s GPT-4o.

In addition to the $13 billion Microsoft had invested in OpenAI as of Sept. 30, the company put in another $750 million in a funding round announced in October, which valued OpenAI at $157 billion.

Microsoft rivals are playing a similar game. Amazon, most notably, has invested $4 billion in AI model company Anthropic, whose founders previously worked at OpenAI. Amazon reports earnings on Thursday.

The OpenAI investment disclosure was new for Microsoft, but the company has registered over $2.3 billion in other expense in the past four quarters. That number has factored in the investment in OpenAI, the spokesperson said.

On the earnings call, Microsoft CEO Satya Nadella said the collaboration with OpenAI has benefited both parties and that the company feels good about “our investment stake in OpenAI.”

OpenAI didn’t immediately respond to a request for comment.

WATCH: Oppenheimer downgrades Microsoft: OpenAI losses are not properly priced in

Oppenheimer downgrades Microsoft: OpenAI losses are not properly priced in

Continue Reading

Technology

Google employees pressure costumed execs at all-hands meeting for clarity on cost cuts

Published

on

By

Google employees pressure costumed execs at all-hands meeting for clarity on cost cuts

Alphabet CEO Sundar Pichai during the Google I/O developers conference in Mountain View, California, on May 10, 2023.

David Paul Morris | Bloomberg | Getty Images

Alphabet executives, donning Halloween costumes, faced questions from concerned employees at an all-hands meeting on Wednesday, following comments on the company’s earnings call suggesting that more cost cuts are coming.

“There is a reality to it,” said Brian Ong, vice president of Google recruiting, according to a recording of the meeting reviewed by CNBC. “We are hiring less than we did a couple of years ago.”

Ong, who was specifically responding to a question about retention and promotion opportunities, added that fewer positions are open and geographic hiring has changed, “so you may see fewer roles available where you are.”

A Google spokesperson declined to comment.

The meeting came after Alphabet reported better-than-expected third-quarter earnings and revenue Tuesday, sparking a rally in the stock. On a call with investors, CFO Anat Ashkenazi, who recently succeeded Ruth Porat, proclaimed she wanted to “push a little further” with cost savings across the company.

Google’s chief scientist, Jeff Dean, wore a starfish costume to the meeting, while Ashkenazi sported a jersey of former Indiana Pacers star Reggie Miller. CEO Sundar Pichai wore a black t-shirt that read “ERROR 404 COSTUME NOT FOUND” with an image of a pixelated dinosaur.

Ashkenazi said one of her key priorities in the new role would be to make more cuts as Google expands its spending on artificial intelligence infrastructure in 2025.

It’s a theme that began in 2023, when the economy and market turned, and has continued since. Google has been restructuring its workforce to move more quickly in the AI arms race, where it faces increased competition. That’s included layoffs, organizational shake-ups, and has led to workers feeling a “decline in morale,” as CNBC previously reported.

Over the last couple of months, Google has made cuts to its marketing, cloud and security teams in Silicon Valley, as well as in its trust and safety unit.

Google is far from alone. Dropbox this week announced it will lay off 20% of its global workforce, while Amazon continues shuttering various projects. Within Google, employees have expressed concern that the company is preparing for more layoffs, possibly after the end of the year, according to internal correspondence viewed by CNBC.

Alphabet is one of the best valued Magnificent 7 stocks says Jake Dollarhide

Pichai joked that the quarterly call was perfect preparation for Ashkenazi ahead of the company meeting.

“I was telling Anat yesterday, earnings calls are a piece of cake compared to TGIF the next day,” Pichai said, to laughs from attendees.

Some employee comments and questions included praise for “another great quarter,” success in chip advancements and improvements in Google’s hit AI note-taking tool NotebookLM. However, other questions expressed fear of what greater cost efficiencies would mean for the workforce.

“What exactly was meant by the comments on further efficiencies in headcount”? one question asked, pointing to Ashkenazi’s comments from the call.

Ashkenazi didn’t share any more details but said employees are “one of the most important assets we have.” She said that the company is investing in people and that it hired 1,000 new graduates in the third quarter.

‘Extraordinary period of capex advancement’

Pichai, who’s been preaching efficiency for almost two years, chimed in to echo past sentiment.

“If you have to do something new and it’s going to take 10 people, if you can find a way to do it with eight people by making smart trade-offs somewhere and aligning teams better, that’s an example of finding efficiencies in headcount as well,” Pichai said.

In response to another question about ongoing layoffs and reorganizations and what might be coming in the future, Pichai said, “If we are making companywide decisions, we’ll definitely let you know.”

He said the company is spending heavily on AI at the moment, but the need to ramp up those expenses won’t last forever.

“We are going through an extraordinary period of capex advancement,” Pichai said. “When you have these technology shifts, at the earlier stages, you invest disproportionately and then the curve gets better and that’s the transition as an industry we are working through.”

He added that not all of the cuts are decided on by top executives.

“It’s not like all of these decisions are centrally done at a company level,” he said. “And so, at the scale of our company, there could be moments where there are small groups of people impacted.”

Ashkenazi on Tuesday mentioned that one way to get more cost efficiency is by using AI internally. The company said 25% of new code is now generated by AI.

In response to a question about productivity, Brian Saluzzo, head of “Core” developers, said that while the 25% refers to low-level tasks, leadership is in the midst of “expanding to more complex areas” within the company.

“Core” refers to the teams that build the technical foundation underlying Google’s flagship products. In May, CNBC reported that Google laid off more than 200 employees from its Core engineering teams, in a reorganization that included rehiring some roles in India and Mexico.

Pichai followed up by saying, “In this transition moment, across all functions, everywhere in the company, it’s worth challenging us to think where we can use AI to be more productive.”

He added that through 2025, the workforce should “strive to do more” and “help customers around the world take those learnings as well.”

Don’t miss these insights from CNBC PRO

Google: More than a quarter of new code is now AI-generated

Continue Reading

Technology

Higher taxes will make it harder for Britain to build ‘the next Nvidia,’ tech execs say

Published

on

By

Higher taxes will make it harder for Britain to build 'the next Nvidia,' tech execs say

UK Finance Minister Rachel Reeves makes a speech during the Labour Party Conference that is held at the ACC Liverpool Convention Center in Liverpool, UK on September 23, 2024. 

Anadolu | Getty Images

LONDON — British tech bosses and venture capitalists are questioning whether the country can deliver on its bid to become a global artificial intelligence hub after the government set out plans to increase taxes on businesses.

On Wednesday, Finance Minister Rachel Reeves announced a move to hike capital gains tax (CGT) — a levy on the profit investors make from the sale of an investment — as part of a far-reaching announcement on the Labour government’s fiscal spending and tax plans.

The lower capital gains tax rate was increased to 18% from 10%, while the higher rate climbed to 24% from 20%. Reeves said the increases will help bring in £2.5 billion ($3.2 billion) of additional capital to the public purses.

It was also announced that the lifetime limit for business asset disposal relief (BADR) — which offers entrepreneurs a reduced rate on the level of tax paid on capital gains resulting from the sale of all or part of a company — would sit at £1 million.

She added that the rate of CGT applied to entrepreneurs using the BADR scheme will increase to 14% in 2025 and to 18% a year later. Still, Reeves said the U.K. would still have the lowest capital gains tax rate of any European G7 economy.

The hikes were less severe than previously feared — but the push toward a higher tax environment for corporates stoked the concern of several tech executives and investors, with many suggesting the move would lead to higher inflation and a slowdown in hiring.

On top of increases to CGT, the government also raised the rate of National Insurance (NI) contributions, a tax on earnings. Reeves forecasted the move would raise £25 billion per year — by far the largest revenue raising measure in a raft of pledges that were made Wednesday.

Paul Taylor, CEO and co-founder of fintech firm Thought Machine, said that hike to NI rates would lead to an additional £800,000 in payroll spending for his business.

“This is a significant amount for companies like us, which rely on investor capital and already face cost pressures and targets,” he noted.

“Nearly all emerging tech businesses run on investor capital, and this increase sets them back on their path to profitability,” added Taylor, who sits on the lobbying group Unicorn Council for U.K. FinTech. “The U.S. startup and entrepreneurial environment is a model of where the U.K. needs to be.”

Chances of building ‘the next Nvidia’ more slim

Another increase to taxation by way of a rise in the tax rate for carried interest — the level of tax applied to the share of profit a fund manager makes from a private equity investment.

iProov CEO discusses 'arms race' against deepfakes

Reeves announced that the rate of tax on carried interest, which is charged on capital gains, would rise to 32%, up from 28% currently.

Haakon Overli, co-founder of European venture capital firm Dawn Capital, said that increases to capital gains tax could make it harder for the next Nvidia to be built in the U.K.

“If we are to have the next NVIDIA built in the UK, it will come from a company born from venture capital investment,” Overli said by email.

“The tax returns from creating such a company, which is worth more than the FTSE 100 put together, would dwarf any gains from increasing the take from venture capital today.”

The government is carrying out further consultation with industry stakeholders on plans to up taxes on carried interest. Anne Glover, CEO of Amadeus Capital, an early investor in Arm, said this was a good thing.

 “The Chancellor has clearly listened to some of the concerns of investors and business leaders,” she said, adding that talks on carried interest reforms must be “equally as productive and engaged.”

Britain also committed to mobilizing £70 billion of investment through the recently formed National Wealth Fund — a state-backed investment platform modelled on sovereign wealth vehicles such as Norway’s Government Pension Fund Global and Saudi Arabia’s Public Investment Fund.

This, Glover added, “aligns with our belief that investment in technology will ultimately lead to long term growth.”

She nevertheless urged the government to look seriously at mandating that pension funds diversify their allocation to riskier assets like venture capital — a common ask from VCs to boost the U.K. tech sector.

Clarity welcomed

Steve Hare, CEO of accounting software firm Sage, said the budget would mean “significant challenges for UK businesses, especially SMBs, who will face the impact of rising employer National Insurance contributions and minimum wage increases in the months ahead.”

Even so, he added that many firms would still welcome the “longer-term certainty and clarity provided, allowing them to plan and adapt effectively.”

Meanwhile, Sean Reddington, founder and CEO of educational technology firm Thrive, said that higher CGT rates mean tech entrepreneurs will face “greater costs when selling assets,” while the rise in employer NI contributions “could impact hiring decisions.”

“For a sustainable business environment, government support must go beyond these fiscal changes,” Reddington said. “While clearer tax communication is positive, it’s unlikely to offset the pressures of heightened taxation and rising debt on small businesses and the self-employed.”

He added, “The crucial question is how businesses can maintain profitability with increased costs. Government support is essential to offset these new burdens and ensure the UK’s entrepreneurial spirit continues to thrive.”

Continue Reading

Technology

Apple’s services unit is now a $100 billion a year juggernaut after ‘phenomenal’ growth

Published

on

By

Apple's services unit is now a 0 billion a year juggernaut after 'phenomenal' growth

Apple CEO Tim Cook (C) joins customers during Apple’s iPhone 16 launch in New York on September 20, 2024. 

Timothy A. Clary | Afp | Getty Images

Apple’s second-largest division after the iPhone has turned into a $100 billion a year business that Wall Street loves.

In Apple’s earnings report on Thursday, the company said it reached just under $25 billion in services revenue, an all-time high for the category, and 12% growth on an annual basis.

“It’s an important milestone,” Apple CFO Luca Maestri said on a call with analysts. “We’ve got to a run rate of $100 billion. You look back just a few years ago and the the growth has been phenomenal.”

Apple first broke out its services revenue in the December quarter of 2014. At the time, it was $4.8 billion.

Apple’s services unit has become a critical part of Apple’s appeal to investors over the past decade. Its gross margin was 74% in the September quarter compared to Apple’s overall margin of 46.2%.

Services contains a wide range of different offerings. According to the company’s SEC filings, it includes advertising, search licensing revenue from Google, warranties called AppleCare, cloud subscription services such as iCloud, content subscriptions such as the company’s Apple TV+ service, and payments from Apple Pay and AppleCare.

On a January 2016 earnings call, when the reporting segment was relatively new, Apple CEO Tim Cook told investors to pay attention.

“I do think that the assets that we have in this area are huge, and I do think that it’s probably something that the investment community would want to and should focus more on,” Cook said.

Over the years, Apple has compared its services business to the size of Fortune 500 companies, which are ranked by sales, to give a sense of its scale. After Thursday, Apple’s services business alone, based on its most recent run rate, would land around 40th on the Fortune 500, topping Morgan Stanley and Johnson & Johnson.

Services appeals to investors because many of the subscriptions contained in it are billed on a recurring basis. That can be more reliably modeled than hardware sales, which will increase or decrease based on a given iPhone model’s demand.

“Yes, the the recurring portion is growing faster than the transactional one,” Maestri said on Thursday.

Apple’s fourth-quarter results beat Wall Street expectations for revenue and earnings on Thursday, but net income slumped after a one-time charge as part of a tax decision in Europe. The stock fell as much as 2% in extended trading.  

Apple boasts to investors that its sales from Services will grow alongside its installed base. After someone buys an iPhone, they’re likely to sign up for Apple’s subscriptions, use Safari to search Google, or buy an extended warranty.

Apple also cites a “subscription” figure that includes both its first-party services, such as Apple TV+ subscriptions, and users who sign up to be billed by an App Store app on a recurring basis.

The company said the installed base and subscriptions hit all-time-highs, but didn’t give updated figures. Apple said it had 2.2 billion active devices in February, and in August said it had topped 1 billion paid subscriptions.

Still, Apple faces questions about how long its services business can continue growing at such a rapid rate. Between 2016 and 2021, the unit sported significantly higher growth, reaching 27.3% at the end of that stretch.

In fiscal 2023, services growth dropped to 9.1% for the year, before recovering to about 13% the next year. Apple told investors that it expected services growth in the December quarter to be about what it was in fiscal 2024.

Cook was asked on Thursday what Apple could do to make some of its services and its Apple One subscription bundle grow faster.

“There’s lots of customers to try to convince to take advantage of it,” Cook said. “We’re going to continue investing in the services and adding new features. Whether it’s News+ or Music or Arcade, that’s what we’re going to do.”

WATCH: Apple has a big leg up in AI

Apple has a big leg up in AI compared to other smartphone makers, says Fmr. Executive Tony Fadell

Continue Reading

Trending